Soft Landing Risks
July 18, 2023
The macro narrative continues to shift toward a soft landing after yesterday’s Empire Fed manufacturing index came in better than expected with big declines in prices paid and prices received. The soft landing narrative initially emerged in January and February, but quickly faded after February core CPI came in hotter than expected. The same thing could happen this time around, but there are two visible risks to watch before we see July CPI next month. The first risk is Russia’s refusal to extend the Black Sea Grain Initiative, which should create upside price pressure on agricultural commodities, specifically corn and wheat. There’s little short-term risk given that the corridor has been nearly empty over the past month. This is mainly due to seasonal factors, but Ukraine should be able to re-route future shipments via rail, trucks and the Danube River. Nonetheless, global balances of wheat and corn have continued to tighten over the last year and the expiration of the Black Sea Grain Initiative will lead to more production loss out of Ukraine. The second potential risk would be large scale fiscal stimulus from China that improves demand for all commodities, particularly industrial metals. Higher commodity prices through the summer and fall could result in the Fed extending its hiking cycle.
The S&P 500 (SPX) is extending toward the upper end of technical resistance near 4565. The catalyst for the move higher has been a better-than-expected early Q2 earnings season. Notable large cap beats have included BAC, DAL, JPM, MS, NVS, SCHW, UNH and WFC . While it’s still very early, aggregate guidance and revision ratios have also improved, providing a tailwind to H2 and FY’24 earnings estimates. Recall this quarter was expected to be the last of the earnings recession as comps get easier beginning in Q3.