The US Economy Is Running Hot, The Fed Trade Just Got Harder
It’s worth analyzing today the macro updates we saw this week, then I’ll go into the charts and targets for this week.
Four numbers dropped back to back and they were loud this week:
Manufacturing PMI came in at 57.0 against an expectation of 53.6. Services PMI hit 58.7 against 55.8. Anything above 50 means expansion, so both sectors aren’t just growing, they blew past what economists modeled. That’s the first clue: the US economy is not slowing down. Implications for the stock market: Strong PMI data usually means strong corporate revenue ahead, so on the surface that’s bullish for equities.
Then came Crude Oil $WTI Crude Oil - main 2611(CLmain)$ Inventories, up 2.969 million barrels when the market expected a drawdown of 0.700 million. That’s a huge miss in the opposite direction, supply built up when it wasn’t supposed to. Implications for the stock market: More supply sitting around usually pressures oil prices lower, which matters for energy stocks and, more broadly, for inflation. Cheaper oil can actually help the inflation fight, which is a small offset to the “too hot” PMI story.
Initial Jobless Claims came in at 197K, better than the 201K expected and even better than the prior week’s 198K. The implication is clear: fewer people filing for unemployment than forecast. The labor market is holding firm, not cracking.
Then New Home Sales for August landed at 684K, versus an expected 615K. That is not a small beat, that’s a blowout, and it came in well above July’s 643K too. Housing is one of the most rate-sensitive parts of the economy, so when it’s this strong, it tells you consumers are still willing and able to make big purchases. Implications for the stock market: That’s a vote of confidence in the consumer, and consumer strength flows straight into consumer discretionary and homebuilder stocks.
This is a week where almost every data point said the same thing: the US economy is running hotter than expected. That’s good for corporate earnings, good for the consumer facing sectors, but it complicates the rate cut story that had been supporting stock valuations. When data surprises to the upside this consistently, watch bond yields. If yields rise because the market pushes out rate cut expectations, that pressure typically shows up first in the most rate sensitive, high multiple names, think growth and tech, while cyclical and value sectors tend to hold up better because they benefit directly from stronger growth.
There’s a catch: good news for the economy is not always good news for stocks, because it changes what the Federal Reserve does next and today the probability for a rate hike in October is 64%.
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