CONSUMER PRICE INDEX
- After falling again with June 2023 reading, the headline trailing 12-month Consumer Price Index (CPI) will hit a brick will. In fact, it could even start moving in the wrong direction. The reason for this is simply math. The monthly readings for the CPI during the 3rd quarter of 2022 were 0.0% and 0.2% and 0.4%. We will likely be replacing them in the equation with observations at, near or even higher.
FEDERAL RESERVE
- Unless a bevy of black swans descends on the U.S., the Federal Reserve will likely increase the overnight lending target another 0.25% during the 3rd quarter. After that, any future moves will be completely dependent on the strength or weakness of the economic data. This means all the rate cuts people had predicted at the start of the year likely won’t come to pass, at least not in the near term.
THE BANKS
- With the end of the tightening cycle in sight, U.S. banks will be wary to continue to raise deposit pricing despite their need for them. As a result, expect banks to continue to rein in credit for the remainder of the year. If history serves as a guide (and we are supposed to say it doesn’t), this could put a ceiling on U.S. economic growth.
STOCKS
- After a surprisingly strong start to the year, especially in June, stocks will be poised for a breather during the quarter, that is unless 2nd quarter corporate earnings dramatically exceed expectations.
ENERGY SECTOR
- A slightly weaker dollar, coupled with a somewhat hamstrung domestic energy sector, means crude oil, natural gas and gasoline prices likely won’t fall as much as consumers would like, if at all. In fact, if China’s economic activity picks up, they could actually start heading higher.
EMERGING MARKETS
- The reopening of China after COVID-19 hasn’t been the economic boom many thought it would be. However, even China’s 3% growth in 2022 (less than half the previous year’s rate) is great news to smaller, less well-developed and natural resource heavy economies. As a result, smaller emerging markets could thrive while providing limited opportunities for U.S. investors.
CHINA PLUS ONE
- For a number of reasons, multinational companies are looking to diversify away from their dependency on China. This is known as Plus One or China Plus One. While countries like Vietnam, Indonesia and the Philippines could benefit, India has the greatest potential for exponential growth. However, investors are worried New Delhi won’t be able to get out of its own way.
U.S. DOLLAR
- Unless the Europeans start slashing their overnight rates, international investing could look promising moving forward for one simple reason: the dollar should weaken as the U.S. tightening cycle comes to a close. After all, no one really expects the remainder of the G-7 to magically ramp up production at this point.
U.S. CONFIDENCE IN INSTITUTIONS
- During July, Gallup, Inc. should release a report that tracks confidence in U.S. institutions. Not surprisingly, it will likely show further erosion in the public’s faith. Some of the biggest losers over the past 12 months could be the military, public schools and the police. After all, Americans had lost their faith in Congress, television news and big business well before 2023.
GEOPOLITICAL STABILITY
- Potential brushfires will continue to nip at the heels of geopolitical stability. Obviously, the way in Ukraine and strife in the South China Sea will dominate global headlines. However, turmoil in places like Haiti, Kosovo, Ethiopia, Kurdistan, Myanmar and Central America could eventually escalate and require already-stretched U.S. resources.
PRESIDENTIAL DEBATES
- Believe it or not, the Republicans will hold their first Presidential debate in late August. It proves to be a 3-ring circus. So, grab some popcorn, your favorite beverage and enjoy the show. Or don’t enjoy, as the case may be.
For more from our Investment Committee in our 2nd Quarter 2023 Macro & Market Perspectives, click the image below.
The opinions expressed within this report are those of the Investment Committee as of the date published. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders or employees.