Market 07/26: FED's favorite inflation gauge rises slightly in June

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Core PCE “hotter” slightly than forecast

• June core PCE index, FED's key inflation measure, at +2.6% YoY, higher than expected +2.5% and unchanged from May

• However MoM, the figure matched forecast at 0.2%, still higher than previous month's 0.1%.

• Confirms prior trend from PMIs and CPI, goods disinflation continues with unchanged services inflation

• MoM components:

• Supercore PCE index up slightly 0.19% MoM (+0.18% prior month) but still on downtrend, stable at 3.43% YoY

  • Core PCE = PCE - food/energy

  • Supercore PCE = Core PCE - housing

• This is the 50th month of supercore group increases with medical services and insurance prices playing a major role

→ Although slightly hotter than expected YoY, PCE's upward momentum continues to show inflation cooling with unchanged components. This reinforces FED's confidence that services inflation will gradually cool over time and overall today's report won't hinder the September rate cut plan.

Prices continue to rise faster than income

• Wage growth much weaker than expected, only +0.2% MoM vs +0.4% expected, while consumption +0.3% in line with forecast

• YoY, although close, prices continue rising faster than income

• Savings rate down to 3.4% from 3.5%, lowest since 12/2022

• These pessimistic income and savings rate figures come amid government heavily injecting money into the economy via social security funds

→ June income growth decline offsets the slightly hotter-than-forecast PCE report this morning. Wage inflation cools as FED expected. However, the report also shows a significant portion of consumer spending is debt-fueled.

Market still 100% convinced FED will cut in September with signals from next week's FOMC

Consumer optimism survey hits 8-month low

• UMich consumer sentiment survey drops sharply in July.

  • Current conditions hit lowest since 12/2022

• Survey shows political party divergence with Democrats notably pessimistic

• Sentiment on buying big-ticket items like homes, cars, furniture all declines

• This is generally positive for FED with stable inflation expectations

  • 1 year: 2.9% in line with expectations

  • 5 year: 3.0% higher than 2.9% expected

3M Earnings Report: Turnaround Story

• Earnings: $1.93/share 15% higher than $1.68 expected

• Revenue: $6.26B 7.3% higher than $5.83B forecast

• Raised full-year operating earnings guidance to $7.00 - $7.30 from prior $6.80 - $7.30

• New CEO: Demand has returned with operating cost-cutting strategies delivering strong results

Steve: After changing CEO at the beginning of May and spinning off the medical division into a separate company to be able to pay the $12.5 billion compensation for the environmental waste discharge lawsuit (PFAS), then it just had the strongest trading day in 36 years, with returning demand and successful cost-cutting activities, is a stock worth watching after the price has cooled off in the ~$110/share range. offering speculators an opportunity to invest in a classic long-standing company ready to innovate after many crises.

Market: Shorts-cover rally continues with belief that FED will set the rate cut date

After macroeconomic data mostly supporting FED's rate cut plan combined with the strength shown in yesterday's GDP report, market sentiment continues to improve in today's session.

After gamma broke into negative territory in recent days, after SPX lost the 5500 level, market positions have stabilized with a large amount of short-dated puts entering during the complete panic crush, helping VIX continue to retreat and pushing the market up in the shorts-cover rally.

IWM overall is still leading quite well above 220. Currently calls are completely dominating

But a bit worried that call volume has pushed the upside IV too high

SPX has created a clearer level, mostly will consolidate in the 5400-5500 range until FOMC

Long-term big tech potential returning quite stable with large investors taking advantage of the recent pullback to buy far-out calls into early 2025 (short index short-term, buy big tech calls long-term)

On internals, everything is generally good with buyers dominating the trading session, sellers disappeared. After today, the shorts-cover rally has mostly ended.