Stocks Look to Claw Back Recent Losses
Here's why we’ll be closely watching today’s Atlanta Fed GDPNow update.
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* Stocks are looking to recover some of their recent losses stemming from carry-trade and recession worries.
* The latest U.S. Logistics Manager’s Index should reduce recession fears.
* Here’s why the market is likely to focus on today’s Atlanta Fed GDPNow update.
* With the market likely to remain bumpy, we’re sticking to our portfolio plan.
Following the worst day of trading in U.S. stocks in almost two years, equity futures suggest the market will attempt to reclaim some of that lost ground today. Lending a helping hand is the pronounced rebound in Japan’s Nikkei 225, which finished up more than 10% earlier today following yesterday’s yen “carry trade” drop of 12.4%.
The “carry trade” theory is that Japanese 0% rates provided an opportunity to borrow in Japan, exchange for U.S. dollars or euro, invest, realize gains, convert back to yen, and pay back the loan while pocketing the difference. Following the Bank of Japan’s recent rate increase, those rates are now above 0%, so the so-called “carry trade” is unwinding and investors have been selling their 0% rate yen loan financed positions.
While yesterday’s better-than-expected July Service PMI reports from ISM and S&P Global helped walk back investors from the recession ledge after last week’s disappointing July Employment Report and July Manufacturing PMI data, we have little in the way of fresh economic data today. One often overlooked data set, the U.S. Logistics Manager’s Index, increased to 56.5 in July, the highest in four months, compared to 55.3 in June, marking eight consecutive months of expansion in the logistics sector.
The U.S. Logistics Manager’s data also showed Transportation Prices hit their highest level since May 2022, making it the third consecutive month in which prices moved higher due to tight capacity and increasing demand. Survey respondents are predicting that these dynamics will hold, suggesting that the freight recession is waning. That pricing data follows the upward trend in July Service PMI pricing components, suggesting further progress on inflation could be on the slow path.
As this gets baked into investor thinking, we’ll be following today’s update for the Atlanta Fed’s rolling GDP forecast, better known as its GDPNow Model. The last figure put Q3 2024 GDP at 2.5%, but that was before the July jobs report and yesterday’s Service PMI data for July. The likelihood is we see today’s GDPNow revision move lower, but the question is how much lower compared to the initial GDP print of 2.8% for Q2 2024?
A big drop could stoke renewed concerns of a hard landing for the economy, but before we jump the gun let’s remember this is a rolling forecast that is updated as new economic data are published. This means we will see a wide array of inputs ahead of the Fed’s next policy meeting, which concludes in 43 days. Our thinking is this will translate into continued bumpiness for the market over the coming weeks.
We’ll continue to read the tea leaves of oncoming economic, industry, and company data with a technical overlay to pick our spots for the portfolio just like we did yesterday.
