Last week, America got the sort of economic data that leaves everyone nodding and squinting at the same time. Inflation cooled. Stocks rallied. Then, retail sales unexpectedly fell. The economy spent most of the week telling investors to relax and ended it with a warning about the consumer.
- While the Dow slipped, other major stock indexes rose for the week, with the S&P 500 closing near a record high. The theme of broadening leadership beyond mega cap technology continued, with small caps continuing their strong year. Energy, utilities, and consumer staples led among sectors, while consumer staples and comm services lagged. The message was that investors liked the inflation news and increasingly believe the Federal Reserve may not need to raise rates in September.
- Treasury yields rose modestly despite favorable inflation reports. The 10-year Treasury yield finished the week at 4.69% and the 30-year Treasury yield ended at 5.26%, and the U.S. Agg shed -0.1% for the week.
- The 0.1% increase in Consumer Price Index (CPI) in July looked more like a speed bump than a fresh acceleration. Year over year, CPI slowed to 3.4% from 3.5% in June. Core inflation, which excludes food and energy, eased to 2.5% YoY from 2.6% despite rising 0.2% for the month. Energy prices fell 1.5% during the month while shelter rose just 0.1%.
- The Producer Price Index (PPI) was unchanged in July after declining 0.1% in June. Economists expected a 0.2% increase. Goods prices fell 0.7%, led by a 3.1% decline in energy costs and a 5.7% drop in gasoline prices, while services prices rose 0.2%. Producer inflation often acts as an early warning system for consumer inflation. This report suggested pipeline price pressures are easing rather than building.
- Retail sales delivered the week's surprise. Advance estimates for retail and food service sales fell 0.6% in July to $764 billion after increasing 0.2% in June, versus expectations for a small gain. Sales were still up 5.0% from a year earlier, but the monthly decline was the first in nine months. Motor vehicle dealers, online retailers, and gasoline stations all posted weaker sales. Consumers are still spending, but they may be spending with the enthusiasm of someone reviewing a restaurant bill after ordering appetizers, dessert, and two drinks.
- Layoffs remain historically low. Weekly initial jobless claims rose 9k to 209k for the week ended Aug. 8, while continuing claims fell 22k to 1,777k. The four-week average remained at 199k. The labor market may be cooling, but employers still are not broadly reducing headcount. That's one reason recession fears have remained contained despite softer job growth.
- Manufacturing and services data continue to point to expansion. The economy is slowing from a sprint to a jog, not from a jog to a collapse. That distinction matters because it helps explain why stocks have continued climbing even as growth indicators become less exuberant.
- WTI oil finished the week up 5%, near $82 per barrel, gold remained elevated above $4,400 per ounce, and copper continued to trade near record territory. Oil's decline during July helped headline inflation readings, while gold's strength suggests investors are still hedging against economic and geopolitical uncertainty. Gold is the financial equivalent of carrying an umbrella on a sunny day because the forecast called for a 10% chance of rain.
- Earnings season continued to provide support for equities. According to LSEG, 453 S&P 500 companies have reported second-quarter results. 85% beat earnings estimates, while 76% beat revenue estimates. Blended earnings growth stands at 51.6% YoY, while blended revenue growth is 15.4%. Companies are not just cutting costs to beat expectations— customers are still showing up.
- Sector earnings growth remains remarkably concentrated. Earnings-growth headliners include energy (143% YoY), communication services (115%), consumer discretionary (90%), and technology (74%). Health care remains the lone major sector showing negative earnings growth.
Upcoming U.S. economic signals
- August 19: Housing Starts & Building Permits
- August 20: Initial Jobless Claims
- August 21: Existing Home Sales
- August 27-29: Jackson Hole Economic Symposium