The Land of the Rising Nikkei 225, and More Wild Numbers
Japan's blue-chip index rallies, our budget deficit balloons and the world looks riskier by the day.
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The Nikkei 225 rallied 3.45% while you dozed off and dreamt about the wonders of gummy bears, baseball and world conquest. Remember, this was the Tuesday session as Japanese markets were closed for a holiday on Monday. That puts the Nikkei 225 at 36,232, which is not just a two-week high; it also means that that index has retaken all of the ground lost during last Monday's (a week before yesterday) panic that took the 225 a whopping 12% lower. Conversely, the yen, which had strengthened to less than 142 to the U.S. dollar on Aug. 5, is now trading just below 148 to the greenback. The yen is still up 4.8% vs. the dollar year to date, while the Nikkei 225, which was down 5% year to date as recently as Aug. 5, after having been up 26% year to date in July, is now up 8% year to date. Can't make this stuff up, kids.
The Deficit, in Incredible Numbers
It may have slipped past you on Monday afternoon ... I mean the monthly Federal budget statement, released by the Treasury Department is not exactly headline news and is rarely, if ever, good news. For July the budget deficit crossed the tape at $243.7 billion, which was worse than expected and, incredibly, only the federal government's third worst monthly deficit of 2024. Want to know why you pay so much more for everything than you did only a few years ago? Look no further than this perverse level of deficit spending and lay the blame where it belongs. At the doorstep of our legislature and this presidential administration.
Oh, don't get me wrong, every Congress and every administration for close to 50 years, with the exception of the Clinton era leadership, is to blame; but that last stimulus package coming out of the pandemic, the American Rescue Plan Act of 2021, was $1.9 trillion in unnecessary spending on top of trillions of dollars of necessary pandemic-era spending that just did not need to happen. That was reckless and that was what lit the fuse that became out of control consumer-level inflation. Consumer-level inflation may return to "normal" levels, but the increased pricing of late 2021 into early 2023 in aggregate will never be unwound without a deep recession. Or worse.
As for July, tax revenue came to $330.4 billion, down from $466.3 billion in June, while federal outlays came to a jaw dropping $573.1 billion. Incredibly, even with the higher revenue for June and what was a lesser month for outlays, the June deficit still rang in at $66 billion. Ten months into the fiscal year, the 2024 budget deficit stands at $1.517 trillion. For all of fiscal 2023, the number was -$1.613 trillion.
Monday Markets
A Yawner? Sort of. Small caps caught another beating. While the S&P 500 literally closed unchanged and the Nasdaq Composite registered a pedestrian gain of 0.21% for the session, the Russell 2000 backed up 0.91%. The somewhat similar S&P 600 was blasted for a loss of 1.23%. Who won on Monday? The Philadelphia Semiconductor Index gained 0.73% for the session, led by your friend and mine, Nvidia NVDA followed by another Sarge favorite, Advanced Micro Devices AMD. These two names posted Monday gains of 4.08% and 1.86% respectively.
Nvidia rallied after UBS analyst Timothy Arcuri, who's rated 5-stars by TipRanks, acknowledged a multi-week delay in eventual shipments of new chips manufactured with the Blackwell architecture, but that any gaps will likely be filled by Nvidia's customers simply taking on additional H200 chips. Arcuri has a "buy" rating on NVDA and a target price of $150.
Treasury debt securities found buyers on Monday. The yield U.S. Ten Year Note dropped four basis points to 4.01%, while the yield for the U.S. Ten Year Note also dropped four basis points to 3.9%. Both of these yields are up about a basis point as we traverse the zero-dark hours.
Breadth
Eight of the 11 S&P sector-select SPDR exchange-traded funds closed out the Monday session in the red, led by Communication Services XLC. Oddly, the other "growthy" sector among the eleven, Technology XLK led the winners, but none of these funds finished the day up or down even a full percentage point.
Losers beat winners by a rough 2-to01 at the New York Stock Exchange, and by about 3-to-2 at the Nasdaq. Advancing volume took a 38.8% share of composite NYSE-listed trade and a more respectable 45.8% share of composite Nasdaq-listed activity. Aggregate trading volume was notably lower across the board, which does show less conviction in anything.
Aggregate trade across NYSE-listings dropped 4.4% on a day over day basis from Friday, while aggregate trade across Nasdaq-listings dropped a fairly severe 15.4%. Additionally, aggregate trade across the membership of the S&P 500 decreased on a day over day basis for a fifth consecutive session on Monday. What that means to me, is that the pros got taken to the woodshed last Monday and have been very cautious about putting that risk back on ahead of his week's inflation numbers.
About Inflation
As readers can see below, July Producer Prices will hit the tape this morning. Expectations are for a mild slowing on a month over month basis both at the headline and the core, but steady year-over-year growth from what was reported for June. Producer price index reports do not seem to have the market impact that consumer price index reports do, but most months, the CPI is scheduled for release ahead of, not after, the PPI. That could lend some unexpected market "oomph" to this morning's release.
As for Wednesday, consumer prices are expected to have accelerated month over month, but cooled year over year. While a truly hot print here would certainly leave a mark on financial markets, I would caution against overreacting to a cool print. As you know, stagflation has been an on-again, off-again threat for some time now.
I don't think there's any doubt that economic activity is slowing down. According to the models I follow, which come from Hedgeye's Keith McCullough and Josh Steiner, this quarter is the lull in consumer level inflation that is still likely to accelerate. Let that sink in. This does not have to be a deep recession or a recession at all. It does not have to be anything like 1970's style stagflation, but it will very likely be a changed economy. The way you go about excelling or just paying the family's bills during that environment will have to evolve from what it is with prices in year-over-year decline.
I do not expect the transition to go smoothly, as there will be political pressure to propagandize an economy headed into a tougher period, but with hard work that we'll do together and the grace of a merciful God, we will draw our terrible swift swords and delve into the economic melee. Those children you peek in on this morning as you leave for work? They think you're a superhero. So, be a superhero. Lead them to a better place, and never let them see you fail ethically or morally. Even if it sucks a little for you. Then again, there is no joy on earth greater than being your children's hero. Rock on.
A World of Danger
By now, I would guess that most sentient beings are well aware that Ukrainian forces had invaded Russia proper and that about 1,000 square kilometers in Russia's Kursk region had come under Ukrainian military control. Russian forces have been forced to bomb Russian territory in defense of an invasion they obviously had not anticipated. Rumors are swirling.
We hear that Ukrainian forces have cut deals with Chechen forces to take the region. We also hear that this was a ruse and that Ukrainian forces inside Russia have been cut off and surrounded. Who knows where and what the truth is. Just be fully cognizant that the danger for an awful event regionally or even globally is now heightened from where it was.
Additionally, Israeli forces have been put on a higher level of alert as a large attack by Iran or Iranian proxies is expected any day now. Remember, there is a large U.S. Naval presence in the area intentionally. Again, the probabilities for an awful outcome in one way or another, are increased. Defense stocks have been working of late. I am always bullish on defense, so there is an admitted bias here, but I'll let Lockheed Martin LMT, RTX Corporation -- the old Raytheon -- RTX, and Northrop Grumman NOC do the talking.
Economics (All Times Eastern)
6:00 a.m. - NFIB Small Biz Optimism Index (July): Expecting 91.6, Last 91.5.
8:30 - PPI (July): Expecting 0.1% m/m, Last 0.2% m/m.
8:30 - Core PPI (July): Expecting 0.2% m/m, Last 0.4% m/m.
8:30 - PPI (July): Expecting 2.6% y/y, Last 2.6% y/y.
8:30 - Core PPI (July): Expecting 3.0% y/y, Last 3.0% y/y.
8:55 - Redbook (Weekly): Last 5.1% y/y.
4:30 p.m. - API Oil Inventories (Weekly): Last +180K.
The Fed (All Times Eastern)
1:15 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: HD (4.56), MSGS (0.18)
After the Close: MRCY (-0.04)
At the time of publication, Guilfoyle was long NVDA, AMD, LMT, NOC equity.
