Macro week ahead

Vulnerable Stocks, Big-Box Store Earnings and Recession Risks Resurface

By:Ilya Spivak

Macro events that may move the markets this week

  • Stocks down, U.S. dollar up as markets see “higher for longer” Fed rates path.
  • Cooling momentum in U.S. economic data flow warns of global recession risk.
  • U.S. retail sales, big-box stores’ Q2 earnings, July FOMC meeting minutes due.

Stocks fell on Wall Street while the U.S. dollar rose last week, as expected. Repricing Federal Reserve policy expectations to a “higher for longer” interest rate path seems to be the most often cited explanation swirling around the markets.

That makes some sense. While the probability of another rate hike in 2023 hasn’t budged – the markets still see July’s 25-basis-point (bps) rise as having capped the tightening cycle – the projected timing and scope of the easing to follow have shifted to a relatively less dovish setting.

The rates trajectory implied in Fed Funds futures shows the probability of a cut in March 2024 has nearly halved, falling from 79% to 42%. The rate expected by year-end has risen from 3.9% to 4.23%. In all, traders shaved off about one standard-sized rate cut from the forecast.

The bond market adjusted accordingly. The ten-year Treasury bond fell 0.86% while five- and two-year paper fell 0.57% and 0.18% respectively. This echoes the sense that most of the adjustment impacted longer-dated rates view rather than expectations for the U.S. central bank’s immediate next steps.

Fed rates outlook steepens even as US economic momentum slows

A look at the economic data flow crossing the wires alongside this repricing makes for a murkier picture. July’s U.S. employment report offered mixed results: nonfarm payrolls disappointed but the jobless rate ticked a bit lower. The headline consumer price index (CPI) inflation print was a bit softer than expected.

Data from Citigroup reveals that – while US economic outcomes still have an overall tendency to print north of economists’ median forecasts – momentum peaked in late July and has now cooled for two consecutive weeks. That seems to run counter to an upshift in the expected Fed rates path unless the markets were primed for something worse.

Citi U.S. Economic Surprise Index
Data Source: Bloomberg

U.S. retail sales data, key earnings reports eyed

This weakening comes amid a dour backdrop elsewhere. The Eurozonecollectively about 15% of the global economyis flirting with recession, if not already in one. Chinathe world’s second-largest economy at close to 18% of the worldwide whole—is still struggling to recover after reopening from “zero-COVID” restrictions in December.

That makes United States the last line of defense against global recession, putting the burden squarely on U.S. consumers. With that in mind, traders will probably have keen interest in July’s retail sales report. Receipts are expected to rise 0.4% from the prior month. Meanwhile, a trio of top retailers—Home Depot (HD), Target (TGT) and Walmart (WMT)are set to report second-quarter earnings.

Stocks may continue lower as the greenback gains if sales data prints on the soft side while forward guidance from big box stores points to ebbing appetite from US consumers. The “higher for longer” overlay may fade however, giving way to a more overtly risk-off tone where Treasury yields decline and the defensively minded Japanese yen rebounds.

U.S. Retail Sales M/M (%)
Data Source: Bloomberg

Fed vs. markets on interest rate expectations

Minutes from last month’s meeting of the Federal Reserve’s policy setting FOMC committee are also likely to command attention. Traders will be keen to gauge the extent to which Chair Jerome Powell and company perceive and are worried about the risk of a downturn in the U.S. business cycle, and how that aligns with their focus on delivering disinflation.

The Fed estimates it can take 12 to 18 months for the impact of a single rate rise to be fully absorbed into the economy. So, pressure from the bulk of last year’s outsized 50- and 75-basis-point rate hikes ought to be appearing right about now. Markets still see rate cuts appearing in the second quarter of next year. If they seem like a more distant prospect for central bank officials, risk appetite may be eroded still further.

U.S. Market-implied Policy Rates
Data Source: Bloomberg

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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