Wall Street tumbled on subdued tech earnings and hotter PMI

·         Overall, S&P PMI and retail sales data indicate upbeat economic activities and hotter RM cost pressure, which may cause slower disinflation in Q3

On Monday, Wall Street Futures, Gold slips further on fading hopes of an early Fed rate cut from Sep’24. Also, Trump 2.0 and Trumponomics may not be assured as ‘ailing senile’ Biden has opted out and smarter/younger/experienced Harris is set to fight against Trump. Although, Trump may be still ahead of Harris in the early opinion poll/approval rating, looking ahead Capitol Hill may be heading for a hung situation, where the Ruling President (Trump or Harris) may have no Trifecta in the 1st two years unlike during Trump 1.0 or Biden 1.0.

On Monday, techs/NQ-100 recovered from China's panic low (AI chip/tech restriction) as the present fluid political situation at the White House (after Biden’s exit from the Presidential race) may not result in such real action. But European stocks surged (relief rally) on fading concern of Trump trade tantrum.

But on early Wednesday, techs stumbled again on subdued QTR results from mega-cap techs Tesla and Alphabet. Tesla tumbled after reporting a subdued report card, especially soft unit sales in China. Google-parent Alphabet also dropped despite beating earnings and revenue estimates, as YouTube ad revenue missed forecasts.

In regular trading Tuesday, Wall Street edged down led by energy, utilities, consumer staples, communication services, industrials, real estate, techs, and healthcare, while boosted by materials, banks & financials, and consumer discretionary to some extent. Among individual stocks, UPS plunged on earnings miss, while GM tumbled amid reports of delays in its electric vehicle (EV) plans. In contrast, GE Aerospace jumped after earnings and revenue beat, with improved profit margins and an elevated full-year outlook (upbeat guidance).

On Wednesday, some focus of the market was on S&P Global flash PMI data for July. The S&P Global Flash data shows US private Manufacturing (MFG) PMI unexpectedly declined to 49.5 (contractions zone) in July, from 51.6 sequentially, below the market consensus of 51.7 and the lowest reading so far in 2024.

The latest MFG PMI reading signaled a sudden deterioration in private business conditions within the goods-producing sector amid falls in new orders, production, and inventories. A reduced rate of employment growth also acted as a drag. Meanwhile, suppliers’ delivery times lengthened marginally, though the lengthening was only very marginal. On the price front, prices charged for goods leaving the factory gate rose the least for a year but input prices rose at a faster pace due in part to raw materials, energy, and logistics. Finally, business sentiment ticked up from June’s 19-month low, often linked to the expansion of capacity and the anticipation of demand improving over the coming year, especially after the election.

On Wednesday, the S&P Global flash PMI data shows US Services PMI rose to 56.0 in July, from 55.3 sequentially, above market expectations of 55.0 and the highest since May’23. New business inflows accelerated sharply, reaching their quickest pace in over a year.

However, service payroll growth was slower compared to June. Prices charged for services increased at the slowest rate in nearly four years, while input costs rose at a faster pace. Despite this, optimism about future output decreased due to uncertainty surrounding the upcoming Presidential Election and potential policy changes. Companies also expressed worries about the ongoing high cost of living, which could impact inflation and interest rates.

Finally, the S&P Global flash data shows US Composite PMI rose to 55.0 in July from 54.8 sequentially, the highest since Apr’22, indicating continual growth of private economic activities over the past 18 months.

The US service sector outperformed manufacturing for the fourth month in a row, with manufacturing output declining for the first time since Jan’24. Overall, new work inflows increased at a slightly reduced rate due to a drop in manufacturing orders, but the service sector saw the fastest growth in new business in over a year. Despite this growth, employment slowed, business confidence fell due to rising political uncertainty, and competitive pressures kept price increases low, though input costs rose significantly.

The S&P Global comments about US PMI for July:

“The flash PMI data signal a ‘Goldilocks’ scenario at the start of the third quarter, with the economy growing at a robust pace while inflation moderates. Output across manufacturing and services is expanding at the strongest rate for over two years in July, the survey data indicative of GDP rising at an annualized rate of 2.5% after a 2.0% gain was signaled for the second quarter. The rate of increase of average prices charged for goods and services has meanwhile slowed further, dropping to a level consistent with the Fed’s 2% target.

The good news is qualified, however, with both the growth and inflation pictures containing some worrying elements to monitor in the coming months. From the output perspective, growth has become worryingly skewed, with manufacturing slipping back into contraction as the service sector gains further strength. Some of the production decline was linked to staff shortages, so could prove temporary – something which is supported by the sector reporting improved confidence about future growth prospects. However, both manufacturers and service providers are reporting heightened uncertainty around the election, which is dampening investment and hiring.

In terms of inflation, the July survey saw input costs rise at an increased rate, linked to rising raw material, shipping, and labor costs. These higher costs could feed through to higher selling prices if sustained, or cause a squeeze on margins.”

Overall, the latest S&P Global PMI data indicated US real GDP growth of around +2.5% in Q3CY24 from around +2.0% in Q2CY24, while the labor market is still tight and higher RM costs may slow the pace of disinflation again in Q3CY24. Thus Fed may continue its wait-and-watch policy in Q3CY24 amid US political & policy uncertainty before launching the 11-QTR rate cuts cycle from Dec’24 till Nov’27.

On 16th July (Tuesday), some focus of the market was also on US retail sales as consumer spending is the backbone of the US economy and the Fed also watches this data closely for an assessment of overall economic activities. On Tuesday, the CB flash data (SA) showed U.S. retail sales for June’24 were around $704.324B against 704.483B sequentially (-0.02%) and 688.630B yearly (+2.28%); i.e. the U.S. retail sales were almost unchanged (0.0%) sequentially (m/m) after upwardly revised +0.3% in May and higher than the market consensus +0.3%, while increased by +2.6%. annually (y/y).

The US retail sales were adjusted for several past years in Apr’24 based on the annual retail trade survey. Before the revision, the 2023 and 2024 (MTD) average retail sales were around $695.251B and $704.024B, while after revision, they became around $692.280B and $701.90B respectively; i.e. revised downwards to some extent. The 3M rolling average of US retail sales is now around $703.829B vs 686.333B yearly; i.e. grew by around  +2.6%, while US core retail sales (w/o food and fuel) grew +2.8%.

Overall, after the latest revisions the average/month retail sales are now around $701.90B in 2024 (MTD) against an earlier average of $701.60B and the 2023 average of $692.36B. The current 2024 (MTD) US retail sales nominal growth is now around +2.3% against the 2023 rate of +3.6%; although cooled, but remained strong,  despite higher borrowing costs and higher cost of living as the labor market is still robust. Adjusted inflation (CPI), the underlying real retail sales has contracted around -0.5% in 2023 against +1.2% in 2022. In 2024 (YTM), the real retail sales contracted by around -1.0%; i.e. real US retail; sales are still negative while continuing to hover around 30% of nominal GDP as overall, the goldilocks nature of the U.S. economy remains intact despite some volatility in underlying economic data due to various transient/seasonal factors.

In June’24, sales at gasoline stations were down and those for autos declined. Sales were also lower at sporting goods, hobbies, musical instruments, and bookstores. In contrast, sales increased at non-store retailers, building materials and garden equipment, health and personal care stores, clothing, furniture, electronics and appliances, general merchandise stores, miscellaneous store retailers, food services and drinking places, and food and beverages stores. Excluding gasoline, sales rose 0.2%, following a 0.5% increase in May. Meanwhile, sales excluding food services, auto dealers, building materials stores, and gasoline stations, which are used to calculate GDP, were up 0.9%, the largest increase since April 2023, following a 0.4% rise.

Overall, although US retail sales are cooling to some extent, it’s still hot enough for the Fed to keep a restrictive rate (higher) for longer to produce more slack in the economy so that demand comes down to some extent and try to balance with the present constrained capacity of the economy, pulling inflation down to around +2.0% on a sustainable basis.

Conclusions:

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market impact:

On Thursday, Wall Street plunged on fading hopes of an early Fed rate cut from Sep’24 as well as Trump’s tax cut move in 2025 as the US may be heading for a hung Parliament/Congress. Tech-savvy NQ-100 plunged after underwhelming mega-cap earnings raised doubts about the sustainability of the artificial intelligence-driven bull market. Broader S&P 500 sank 2.3%, booking its worst day since Dec’22, while the NQ-100 marked its worst day since October 2022, down -3.6% and the Dow tumbled -503 points.

Google parent Alphabet slumped on the company's higher-than-expected spending on AI efforts and disappointing YouTube advertising revenue. Tesla’s shares tumbled after reporting a drop in auto revenue a profit miss and delays in the Robotaxi project. Visa dropped the lowest since December due to a decrease in payment volume and processed transactions. Chip stocks also tumbled as Nvidia, and Broadcom lost and Arm nose-dived, while AT&T jumped after surpassing expectations for wireless subscriber additions.

On Thursday, Wall Street was boosted by utilities, healthcare, energy, and consumer staples, while dragged by techs, consumer discretionary, communication services, industrials, real estate, materials, and banks & financials. DJ-30 was dragged by Visa, Intel, Microsoft, Boeing, Nike, Amazon, Apple, Home Depot, Salesforce, American Express, and Caterpillar, while boosted by J&J, Verizon, Coca-Cola, Merck, Cisco, United Health, P&G and Amazon.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500 and Gold

Whatever the narrative, technically Dow Future (40500) has to sustain over 40700-40900 for any further rally to 41000/41300-41500/41800 and 41950/42000*-42700 in the coming days; otherwise sustaining below 40650, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (20000) has to sustain over 20200/20600-20800/21050 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 21000/20900-20700/20300 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5580), now has to sustain over 5650-5750 for any further rally to 5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5700/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2410) has to sustain over 2435 for a further rally to 2455*/2475-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2425/2390-2375/2355, may further fall to 2320/2300-2290/2275* in the coming days.