From “Oh, No!” to “FOMO”
July 14th, 2023
Encouraging inflation figures this week helped bulls brush off last week’s hotter than expected ADP jobs report. June’s CPI report showed overall inflation declined to 3.00% year-over-year, moving it closer to the Fed’s target level and potentially alleviating some pressure on future interest rate hikes. Investors also received positive news on the earnings front this week where the big banks — including JPMorgan Chase, Wells Fargo, and Citigroup — all posted better than expected results as strong loan growth and higher interest rates helped to boost the banks’ bottom lines. Early indications from earnings calls suggest that slowing inflation, strong wage gains, and a favorable jobs market in the U.S. remain supportive for consumer spending in 2H 2023. Furthermore, the strength in U.S. consumer spending is offsetting declining demand for manufactured goods, which disproportionately impacts China – the world’s second largest economy. June’s trade data showed Chinese exports contracting at their fastest rate since February 2020, which even if it officially has not entered a recession almost certainly feels like a recession by comparison. The CPI report was the week’s centerpiece, however, and bulls took charge on the belief that a soft landing is virtually assured. The renewed optimism helped push the S&P 500 higher by 2.42% for the week.
Inflation is About the Only Thing Cool This Summer
Consumer prices continued to soften in June with the CPI index rising 3.00% year-over-year (yoy) in June. That’s down from May’s 4.00% level and a sizable drop from the year ago peak of 9.10%. June’s reading also represents the slowest pace since March 2021. Core prices, which exclude volatile food and energy, rose 4.80% yoy. Shelter costs remain a thorn in household budgets, rising 8% yoy according to June’s reading. Core services inflation, which excludes energy, also remained elevated, rising 6.20%. While the 4.8% core reading is likely to keep the Fed raising rates in July, inflation’s month-to-month change was particularly encouraging. Both headline and core inflation rose just 0.20% (2.4% annualized) while core services prices rose 0.30% (3.6% annualized). This was a decline from the 0.40% (4.8% annualized) reading in May as transportation and medical care services pricing softened. Producer prices, which are often a precursor to CPI, showed that even more relief may soon arrive. PPI rose just 0.10% on both a year-over-year and month-to-month basis. Meanwhile, core producer prices rose a modest 2.60% yoy and were up just 0.10% month-to-month. Despite the positive headlines, the Fed is still very wary of recent wage growth trends, which grew at 4.4% yoy in June, and they are virtually assured to raise rates again later this month.
Global Trade Feels Pinch of Consumers’ Shift
Global demand for goods continued to fall in June with China reporting a -12.40% decline in exports from a year ago. That’s the sharpest decline the country has recorded since February 2020. It was also below expectations of a -9.50% contraction and worse than May’s -7.50% drop. Meanwhile, imports fell -6.80% yoy in June, down from May’s -4.50% as domestic consumer spending slowed amid faltering confidence in the country’s economic rebound. With many developed countries battling high prices and slowing growth of their own, the outlook for China’s exporters is likely to be cloudy the remainder of the year.
Final Thoughts
It didn’t take long for markets to forget about last week’s hot jobs data once this week’s inflation report dropped. While the data was certainly encouraging, and solidly beat expectations, it is unlikely to do much to prevent the Fed from raising rates when they meet again at the end of July. The month over month headline and core readings were particularly encouraging, approaching the Fed’s 2% target, but the rate of wage growth remains a lingering concern. Even with a rate hike or two left in the cards, investors are betting that a soft landing is now the most likely scenario for the US economy. Evidence of this could be seen in this week’s initial earning report from the big bank. It’s a perverse twist of fate that higher rates, which nearly triggered a banking crisis, and which has virtually handcuffed the mid-tier banking sector, should so greatly benefit the megabanks. JP Morgan, who acquired First Republic in a fire sale, saw a $2.7 billion profit for their efforts and saw its profits rise 67% relative to the same quarter a year ago. Meanwhile Wells Fargo’s earnings grew a paltry 57% by simply lending at higher rates. As Mel Brooks once said, “It’s good to be the king.” This week’s bank results showed that while banks are becoming more selective in their lending, business, consumer and mortgage loans still remain in solid demand, which fit Wall Street’s soft-landing mantra. As of July 7th, analysts had forecasted S&P 500 earnings to fall -6.40% yoy, but the takeaway for investors from this initial earnings round was that the economy still remains on stable ground.
The Week Ahead
Slowing inflation brings relief to consumers’ wallets. We’ll see if that translates to higher spending on goods with the release of June retail sales. It’s been a banner year for homebuilders as homebuyers flock to new construction amid tight inventory in the existing home sales market. The trend is set to continue in June. The Q2 2023 earnings season continues with consumer discretionary and industrial firms joining financial companies in releasing their corporate earnings results.
Everyone in South Korean Just Got One to Two Years Younger
Last month, everyone in South Korea got slightly younger. Traditionally, a baby born in South Korea is thought to be one year old at birth. This is known as “Korean age,” and a year is added every January 1st. This means that a baby born on December 31st would be two years old on New Years Day which makes people a year or two older than they really are. This age counting method has been in practice for centuries. A new law that recently went into effect now switches everyone to the international age standard which starts people at age zero on the day they are born and bases age on the passing of birthdays.
When the new law went into effect, twenty-somethings dropped back into their teens, and a person who turned 75 could celebrate their diamond jubilee again. The law was passed to eliminate confusion in a country that has its citizens keeping track of their Korean age, their calendar age, and their international age. In South Korea, calendar age is used to determine the legal age for drinking, smoking, and military conscription. In legal and administrative matters, international age is typically applied. In social settings, Korean age is used, and in a society that is very hierarchical based on age and where age influences social status, it isn’t considered rude to ask someone their age. In fact, it’s necessary to determine whether a more formal or more casual version of language is used to address an individual. The Korean language encompasses varying levels of speech and honorifics based on age and status. Even kids on the playground will first ask each other their age before sharing their names. The new law means that individuals will have to be more precise in saying their age and will revisit the titles and honorifics used in conversation.
Korea wasn’t the only country to have an advanced age standard. Many East Asian countries considered time spent in the womb as part of age. Japan, China, and Taiwan shifted to the international age standard a long time ago. In 2022 while on the campaign trail, South Korea’s current president made the adoption of the international age standard one of his campaign promises, and the legislation went into effect in June 2023.
Turning back time is reported to bring relief to those 20-somethings whose parents expected them to marry by age 30. Now they have one or two additional years. It helps expats who aged up simply by moving to the country. The new law does not affect when South Korean males become eligible to serve their mandatory military duty which is January 1 of the year they turn 18 in international age. The country’s legal age for drinking and smoking stays the same as well, remaining January 1 of the year a person turns 19 in their international age, regardless of whether their birthday has passed.