The market is trying its hardest to finish flat to slightly ahead this week. That’s saying a lot since we entered the week by putting our right shoe on our left foot. That’s to say, people have been decidedly negative on the economy, considering diminishing growth, aggressive interest rate hikes, and skyrocketing inflation. While there was a smattering of earnings announcements this week, mostly coming from banks and other financial institutions, we will see a more diverse and larger number of companies report next week. Let’s hope the upbeat momentum carries forward.
One area that has done particularly well this year has been the energy sector. In fact, it was the only sector that finished the first half in the green. However, you may have noticed gasoline prices are slowly coming down if filled your tank recently. No, the price of gas hasn’t returned to “normal” but it is steadily declining. Crude oil, which earlier this year traded as high as $123 per barrel is now trading around $95 due to fear of a coming recession. However, there is a wrinkle that could drive prices higher later this year. Europe, which depends heavily on Russia for both natural gas and petrol (as they say over there), is facing a bleak outlook for the coming winter. This week, Russia took it’s Nord Stream 1 pipeline offline for annual maintenance, with some suggesting it may not come back online this year. If this plays out like some believe, we could see oil and natural gas spike again before the year is over.
In other news, for the first time since the launch of the Euro, the U.S. Dollar has reached parity. This is a wonderful development for U.S. tourists visiting Europe this summer, but it is a larger hurdle for U.S. manufacturers who sell goods abroad. The reason for this drop in the Euro is that things are far worse across the pond. This is partly due to the energy crisis that is unfolding there, but also because the European Central Bank (ECB) has been slow to raise interest rates, unlike its counterpart in the U.S. Both Europe and Japan are sticking to a dovish monetary policy, hoping that a weaker currency will help stimulate growth in their respective countries. While you can find some benefits to a strong dollar, it does pose a real problem for U.S. manufacturers.
Last week I mentioned how United Airlines blames the Federal Aviation Authority (FAA) for its cancelation woes. I might have been a bit too quick in discounting its concerns. This week London’s Heathrow Airport has taken the extraordinary step of asking airlines to stop selling summer tickets altogether. The airport is struggling with staff shortages and delays much like many of the major airports in the United States. Heathrow released a statement explaining that the airport cannot cope with the surging passenger traffic that has regularly exceeded 100K per day with current staffing. It appears that summer travel has recovered if not exceeded pre-pandemic levels. People who have postponed travel and vacation for the past two years have apparently decided they all want to travel NOW. While I still don’t like the business practice of overbooking flights, I apologize to United Airlines for not taking its issues seriously enough.
With regards to the economy, while it continues to trudge along, things aren’t as bad as the news portrays. With consumer sentiment readings at all-time lows (going back 70 years), it is impressive that retail sales have maintained a healthy level. And while credit has increased, it is still below pre-pandemic levels. The Nonfarm Payrolls report last week showed over 370K jobs created in June, while the initial unemployment claims aren’t any higher than the long-term average of 225K per week. What remains red hot is the unsustainably high inflation rate which topped 9% in June. This sets the stage for another 75-basis point interest rate hike on July 28, when the FOMC next meets. While some believe the Fed could raise rates by a full 1% at the next meeting, that seems unlikely.
In closing, I turn to a feel-good story that is sure to make you smile in appreciation and perhaps understanding. With skyrocketing inflation, it is reasonable that a zoo may want to cut costs by reducing either the amount or the quality of the food it feeds its animals. After all, food must be among its largest expenditures. With that in mind, a zoo in Japan began feeding its king penguins a less expensive, and apparently less delectable, common mackerel. It seems the penguins prefer horse mackerel, and can be seen refusing to eat in a video that has gone viral. If you find yourself eating some leftovers that aren’t terribly appetizing, maybe you can relate. Now you know.
Bruce J. Mason, MBA