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Likes ReceivedThe U.S. stock market and consumer economy are doing quite well. Will the Fed really cut rates in September and implement three consecutive cuts?
Last week, the US stock market saw a flurry of releases from Q2 GDP to consumer spending and PCE inflation data. So, what do these figures reveal about the US economic trajectory? And how might they impact this week's FOMC meeting? Dolphin Research's weekly strategy report takes a deep dive:
1. US Consumer Spending: Resilient Despite High Rates
In last month's report "Is the US Consumption Engine Losing Steam?", Dolphin Research noted that as employment normalizes, the pace of marginal consumption slowdown would increasingly shape economic expectations. Last week's June income/expenditure data surprised—not only was June consumption robust, but May figures were also revised upward.
First, household income: Seasonally adjusted annualized income rose by $44 billion MoM in June (+0.3%), a modest increase reflecting slowing job growth.
The key issue lies in spending allocation: The savings rate dipped to 3.36%, a 2023 low. Despite just $50 billion in total consumption growth, marginal spending surged $58 billion—showcasing aggressive drawdowns from savings.
With upward revisions to April-May consumption and lower savings rates, 2024 has seen persistent consumption outpacing income growth—high rates aren't boosting savings but accelerating spending.
As Dolphin Research highlighted, this stems from post-pandemic household balance sheet strength: ample savings and declining net debt burdens foster financial confidence, enabling lavish spending.
2. Business Investment Rebounds, Q2 GDP Accelerates
Q2 GDP surprised at 2.8% annualized (vs Q1's 1.4%), fueled by resilient consumption, resurgent corporate investment, and sustained government spending.
While services consumption slowed to +1% (from 1.5%), goods spending rebounded to +0.6% (from -0.5%). Households contributed 1.6pp to GDP growth.
After a year of caution, corporate investment jumped to 1.5% YoY (vs 0.8%), driven by inventory rebuilding (+0.75pp contribution). Residential investment stalled, but equipment spending surged—suggesting completed facilities now need machinery. IP investment remained cyclically resilient.
Combined, businesses matched consumption's GDP contribution in Q2.
3. Core PCE Edges Up But Stays on Disinflation Path
June core PCE rose 0.18% MoM (vs May's 0.13%). Dolphin Research sees this as benign—sub-0.2% monthly gains align with the Fed's 2.4% annualized target. The Fed has signaled it won't wait for exact 2% inflation to cut rates.
With July-August data potentially extending the "good news" streak, the Fed could gain confidence for a September 18 rate cut. However, strong employment, consumption, and corporate investment may afford flexibility to delay until November.
At the July 31 meeting, Chair Powell may hint at impending cuts but avoid committing to September—preserving policy optionality amid stable growth.
Thus, while rate-cut bets are valid, excessive pricing seems unwarranted—markets already fully price 25bp cuts at every 2024 meeting starting September.
4. Portfolio Update
No adjustments last week. The portfolio dipped 0.7%, outperforming SPX (-0.8%), MSCI China (-2.3%), Hang Seng Tech (-2.6%), and CSI300 (-3.7%) due to pre-earnings de-risking.
Since inception, absolute returns hit 36.5% (60.5% alpha over MSCI China). The virtual $100M portfolio now stands at $138M.
5. Stock Performance
Nasdaq led declines last week amid global weakness, excluding Russell 2000 and Dow.
Key movers in Dolphin's coverage:
6. Asset Allocation
The Alpha Dolphin portfolio holds 10 equities/ETFs (2 standard-weight, 8 underweight), plus gold, Treasuries, and cash. Allocation as of last week:
7. Earnings Season Frenzy
This week features Mega 7 earnings (MSFT, META, AMZN, AAPL), AI hardware (AMD, QCOM, ARM, INTC), and China ADRs (LK, EDU). Dolphin Research will publish rapid analyses, deep dives, and call transcripts on LongPort—(here).
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Disclosures: Dolphin Research Disclaimer
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