Fighting Words, Odd Retail Numbers, Fed Day, Microsoft's AMD Deal
Let's dig into some ugly and strange economic data, look at the Israel-Iran situation and preview the FOMC meeting.
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Good morning. Zero-dark thirty. Wednesday. The Federal Open Market Committee went into its two-day policy meeting on Tuesday. We'll hear from the group this afternoon. Israel and Iran exchanged hostilities for a sixth day as Pres. Trump met with his national security team to discuss the conflict and how to bring about its end. The president then spoke with Israeli Prime Minister Benjamin Netanyahu. We know little more than that.
Overnight into Wednesday, the IDF claimed that it had hit a facility in Iran where centrifuges had been manufactured. It appears that overnight, Iranian forces had launched more missiles at Israel, but for a second consecutive night, had little success in puncturing the defensive set-up now in place.
Asian equity markets were mixed on Wednesday, with Japan outperforming China. European stocks opened to the upside, but just slightly, as U.S. equity index futures leaned into the green, but not significantly so. Tuesday had been a tough day for financial markets in the U.S. as traders and investors speculated that the U.S. could take offensive action in Israel's war on Iran and a number of macroeconomic numbers printed on the wrong side of expectations.
'Unconditional Surrender'
Tell us what you really mean, Mr. President. On Tuesday, after leaving the G-7 summit in Canada early, Pres. Trump posted to social media, "We know exactly where the so-called 'Supreme Leader' is hiding. He is an easy target but is safe there - We are not going to take him out (kill!), at least not for now. But we don't want missiles shot at civilians or American soldiers. Our patience is wearing thin. Thank you for your attention to this matter!"
The president then followed that post up with another, "UNCONDITIONAL SURRENDER!" It may be key to note that the 30,000 pound bunker buster is the only conventional munition likely capable of taking out Iran's nuclear facilities that are buried in the mountains and fortified with several feet of concrete. The US B-2 Bomber, built by Northrop Grumman NOC with an engine produced by GE Aerospace GE is the only way to deliver such a heavy weapon. The bomb itself, a GBU-57 MOP (Massive Ordnance Penetrator) is a Boeing BA product.
Retail Sales
On Tuesday morning, the Census Bureau released May retail sales data. At the headline, the numbers were ugly. May sales printed at -0.9% from April, which in turn was revised to -0.1% (from +0.1%) from March. Ex-autos, or core, May crossed the tape at -0.3% from April, which was revised to 0.0% or flat (from +0.1%) from March. On the surface, it would appear that the U.S. consumer is slowing down. But there were some real oddities in these numbers.
Obviously, auto sales slowed, hence the gap between the headline and core numbers. Oddly enough, though, sales of building materials printed at -2.7% month over month; this sort of fits with the NAHB Home Builder Optimism Index for June that dropped to 32 from 34 when Wall Street had been looking for 36. With 50 being the line between optimistic and pessimistic, that's pretty dour. Furniture sales, however, were up 1.2% month over month. Often furniture sales don't do that well when sales of building materials sag and homebuilders are miserable. So, that was strange.
Another ball out of left field was this: sales at food and drink establishments were down 0.9% month over month, which goes along with the narrative that the consumer is pulling back. Sales for the category labeled sporting goods, hobbies, music and books, however, were up 1.3%. This is a category where everything within is discretionary in nature. Hence, this category's sales almost always rise and fall with consumer confidence and sentiment. That certainly does not fit the narrative.
Industrial Production
Another black eye for the economy here: A little later on Tuesday morning, the Federal Reserve released the May data for industrial production and capacity utilization. Headline industrial production for May crossed the tape at -0.2% month over month, well below consensus, as April was revised higher to growth of 0.1% (from flat) from March. Within all things industrial, manufacturing production landed at +0.1%, Mining production printed at +0.1% and utilities production landed in beatdown city at -2.9%, but that was coming off of 4.9% growth for April.
Capacity utilization dropped sharply from 77.7% in April to 77.4% in May. For those that don't exist in a statistical wonderland like myself, this is a huge one month move for this series. Manufacturing capacity held at 76.7%. Mining capacity improved from 91% to 91,1%. Utilities capacity, however, fell from 70.8% all the way to 68.5%. This, however, was still above March's level.
Impact on GDP
Still, on Tuesday morning, the Atlanta Fed revised its second-quarter GDPNow model lower to growth of 3.5% from 3.8% (q/q, SAAR). After the above data hit the tape, Atlanta tweaked its inputs for Q2 real personal consumption expenditures and real government expenditures lower, offset to some degree by an upward tweak to real gross private domestic investment. It is important to keep in mind that Atlanta runs the only Fed gross domestic product model that updates its model midweek and has been, so far, the upside outlier this quarter. Both New York and St. Louis update their models on weekends, and Cleveland revises its model, so rarely, I sometimes wonder if it's still paying attention. The Atlanta model will likely be revised yet again later this morning after May Housing Starts hit the tape.
Fed Day
The FOMC will release the committee's official policy statement at 2 p.m. ET this afternoon along with an update to the group's quarterly economic projections. Those projections will include the infamous "dot plot," which forecasts the Fed Funds Rate going forward and is considered to be absurd by most professional economists. Fed Chair Powell will hold his dog and pony show for the financial media at 2:30 p.m. ET.
At the moment, Fed Funds Futures trading in Chicago, are pricing in a 99.9% probability that no rate changes are made today. A 65% likelihood for a quarter percentage point rate cut is currently priced in for Sept. 17, while these markets show a 64% chance for a second quarter point rate cut on Dec. 10.
Markets
Yes, stocks sold off on Tuesday. Yes, ten of the 11 S&P sector SPDR ETFs closed in the red. Consumer Discretionaries XLY and Health Care XLV led the losers, while Energy XLE traded higher for obvious reasons. Breadth was ugly. But trading volume was extremely light. Aggregate trade dried up across NYSE-listings, across Nasdaq-listings and across the membership of the S&P 500 as professional managers for the most part, sat on their hands.
News
Microsoft MSFT announced on Tuesday, a multi-year partnership with Advanced Micro Devices AMD to "co-engineer silicon across a portfolio of devices." This will include the next-generation Xbox console. This is supposedly going to be about delivering "an Xbox experience not locked into a single store or tied to one device." Readers may recall or want to refer back to my "new target price" piece on AMD, which was published here on Tuesday.
The Future of Labor?
On Tuesday, Amazon AMZN CEO Andy Jassy wrote a letter to Amazon's workforce. If you are a shareholder, this letter might excite you. If you work for Amazon or really almost anyone else, it probably terrifies you. Here is an excerpt from what is a lengthy piece to give readers here an idea:
"Today, we have over 1,000 Generative AI services and applications in progress or built, but at our scale, that’s a small fraction of what we will ultimately build. We’re going to lean in further in the coming months. We’re going to make it much easier to build agents and then build (or partner) on several new agents across all of our business units and G&A areas."
Jassy then adds...
"As we roll out more Generative AI and agents, it should change the way our work is done. We will need fewer people doing some of the jobs that are being done today, and more people doing other types of jobs. It’s hard to know exactly where this nets out over time, but in the next few years, we expect that this will reduce our total corporate workforce as we get efficiency gains from using AI extensively across the company."
Folks, times this by a thousand. Times it by 10,000. This is what Andy Jassy is honestly telling his workers. Just think about how many businesses across this country and the developed world are thinking or even dreaming about using this exploding new technology in ways that increase efficiency and ultimately reduce overhead related to payrolls and benefits. Not yet, but it's going to get ugly out there, gang.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.93%.
07:00 - MBA Mortgage Applications (Weekly): Last 12.5% w/w.
08:30 - Initial Jobless Claims (Weekly): Expecting 251K, Last 248K.
08:30 - Continuing Claims (Weekly): Last 1.956M.
08:30 - Housing Starts (May): Expecting 1.36M, Last 1.361M SAAR.
08:30 - Building Permits (May): Expecting 1.425M, Last 1.422M SAAR.
10:30 - Oil Inventories (Weekly): Last -3.644M.
10:30 - Gasoline Stocks (Weekly): Last +1.504M.
noon - Natural Gas Inventories (Weekly): Last +109B cf.
4:00 p.m. - Net Long-Term TIC Flows (Weekly): Last $161.8B.
The Fed (All Times Eastern)
2:00 p.m. - FOMC Policy Decision.
2:00 - FOMC Economic Projections.
2:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: KFY (1.26)
At the time of publication, Guilfoyle was long MSFT, AMD, NOC, GE equity.
