Philly Fed Slowdown In The Service Sector

By Michael Lebowitz and Lance Roberts | August 23, 2023

As we have discussed for the better part of the year, the national and Fed manufacturing surveys signal economic contraction, while the service sectors (non-manufacturing) remain strong. Thus far, the service sectors have offset the weakness in manufacturing. Given the service sector is much larger than manufacturing, we have keyed on the sector for indications that the lag effect is finally catching up with the economy. Tuesday’s Philadelphia (Philly) Fed non-manufacturing index may be the first warning. Keep in mind these surveys tend to be volatile and provide false signals. However, if other non-manufacturing surveys show results like the Philly Fed, as detailed below, a recession could be creeping up on us.

As the table below shows, the Philly Fed non-manufacturing index fell in August to -13.1 vs. +1.4 in July. New orders, sales, and business activity all rolled over and are in contraction. The Philly Fed employment outlook also weakened. The number of full and part-time employees fell, along with the average work week and wages. In addition to weaker economic activity, the report points to a pick-up in inflation. Prices paid and received both rose. The data for the survey was taken from August 7 through the 17th, so it is as close to real-time as possible.

Summary of Returns (August 2023).

What To Watch Today


Earnings Calendar.


Economic Calendar.

Market Trading Update

The market was unable to hold its early morning gains yesterday. However, with the “sell signal” still intact, gains look to remain limited for now. The market remains oversold enough to continue the rally that started on Friday. Nvidia’s (NVDA) earnings report could potentially fuel a bit of a rally today if the outlook is good. Once we get past the Jackson Hole summit the market should have a bit clearer path to trade on. Remain cautious for now and watch the 100-DMA as the next critical support level.

Market Trading Update.
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Buckle Up For NVDA Earnings

Three months ago, Nvidia (NVDA) reported earnings well above expectations and revised their earnings expectations for the next quarter much higher. Consequently, NVDA soared by nearly 25%. NVDA’s earnings also kicked off a strong rally of the magnificent seven. The NASDAQ rose about 17% when it peaked two months later. Heading into today’s earnings announcement NVDA is up over 50% from their May earnings release and, unlike most stocks, has been resilient during this recent downdraft. NVDA is up nearly 15% over the last six trading days in anticipation of earnings.

Expectations for NVDA earnings are sky-high. If they handily beat such estimates as in May, the sky is the limit for NVDA shares. However, the concern is if they meet expectations or fall short. We share the table below to help us appreciate how NVDA earnings may translate to the broader markets and other tech stocks. The stocks are sorted from high to low by their correlation to NVDA. February 2022 provides a glance at what a bad earnings announcement may portend for NVDA, the broad indexes, and tech stocks, while their prior May announcement helps us appreciate the potential upside. NVDA earnings will be released after today’s market close.

Historic Moves on NVDA Earnings.

Bitcoin Update

As shown below, Bitcoin trades below its 200dma and 200wma in a bearish warning for crypto investors. However, its 200dma is rising above its 200wma, and both lines are still trending upward. If Bitcoin stays below both moving averages and the averages start declining, a more serious bear warning is in store for Bitcoin investors.

What might such a warning mean for stock investors? The second set of charts shows there has been a robust correlation between Bitcoin and SPY, and QQQ since 2020. Unlike Bitcoin, the S&P 500 and the Nasdaq are well above their 200dma and 200wma.

Reflexivity Research published on August 21, 2023.
Correlation Bitcoin to SPY and QQQ.

Effective Mortgage Rates and The Lag Effect

The Tweet of the day below shows that mortgage rates are nearing 7.5%. The graph below shows that despite the surge in mortgage rates, the effective rate of all outstanding mortgages has barely budged higher. It now sits at a relatively meager 3.6%. These graphs help explain the lag effect of higher interest rates. Simply, it can take a long time for consumers and corporations to feel the effect of higher rates. The effective rate will continue to rise with each new mortgage origination. However, the supply of homes for sale is very low, ergo, the effective rate will be slow to increase.

Effective Mortgage Rates.

Tweet of the Day

Tweet by @JeffWeniger "The 30-year mortgage has opened up a gap of 3.14 percentage points over the 10-year Treasury. It just keeps going up and up. Higher now than even the widest part of the Global Financial Crisis. Ruthless."

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