8/7/2023 Weekly Update - The McElwee Report
Unbiased, Insightful Content Sourced from Primary Data
Key Takeaways
The unexpected U.S. Credit Rating downgrade by Fitch Ratings (negative), strong earnings beat by Amazon (AMZN) (positive), and lower-than-expected job gains in July 2023 (mixed) were catalysts for last week’s market performance.
A continued boom in private nonresidential manufacturing construction is a key trend from last week’s data releases.
The most highly anticipated event this week will likely be the release of July 2023’s Consumer Price Index (CPI) on Thursday, August 10.
The direction of the market continues to hinge on data releases of inflation indicators, especially after the Fed affirmed its “data-dependent approach in determining the extent of additional policy firming” in last week’s press conference.
Market Factors
Fitch Downgrade of U.S. Credit Rating. After market hours on Tuesday, August 1, Fitch Ratings downgraded the U.S's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA'. In its rating action commentary, Fitch stated that its rating downgrade of the United States reflects:
The expected fiscal deterioration over the next three years,
A high and growing general government debt burden, and
The erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.
This ratings action coincides with the Wednesday, August 2, announcement by the U.S. Department of Treasury to increase the issuance of its long-term debt this quarter and the looming threat of a government shutdown on October 1, 2023.
Debt Issuance. In its Quarterly Refunding Policy Statement for Q3 2023, The U.S. Department of Treasury announced an offering $103 billion of Treasury securities - the first increase since early 2021. The Treasury expects further, gradual increases in offerings for future quarters to meet intermediate to long-term borrowing needs. In “The 2023 Long-Term Budget Outlook” (released in June 2023), the U.S. Congressional Budget Office, which provides nonpartisan analysis for the U.S. Congress, paints a challenging picture for the U.S.’s fiscal outlook - “Debt held by the public rises from 97 percent of GDP at the end of 2022 to 98 percent of GDP in 2023 in CBO’s projections. By 2029, debt held by the public climbs to 107 percent of GDP, exceeding the historical peak of 106 percent reached in 1946, immediately after World War II. In 2053, debt reaches 181 percent of GDP and is on track to rise higher still.”
The U.S. Congressional Budget Office’s Federal Debt Held by the Public as Percentage of GDP Projections. Threat of Government Shutdown. After concluding its August recess, Congress must pass the remaining 11 of 12 appropriations bills by September 30, 2023, for the new fiscal year, which begins on October 1, 2023. To avoid a government shutdown, Congress can pass a stopgap funding bill.
Increasing Cost of Energy and Inflation. Energy prices are continuing to increase due to the following factors:
Saudi Arabia announced on Thursday, August 3, an extension of oil production cuts (one million barrels a day for an additional month).
After Saudi Arabia’s decision, Russia announced a production cut of 300,000 exported barrels a day for September 2023.
On Wednesday, August 2, the U.S. Energy Information Administration (EIA) reported in its Weekly Petroleum Status Report a decrease of 17.0 million barrels (from the previous week) in U.S. commercial crude oil inventories (excludes Strategic Petroleum Reserve). Reuters reported that this decrease is “the largest drop in U.S. crude inventories according to records dating back to 1982.”

Increasing energy prices negatively impact the downtrend in inflation indexes, such as the Consumer Price Index (CPI). Core PCE, a preferred inflation indicator by the Fed, is still more than double the Fed’s 2% target inflation rate (June 2023 +4.1%). The probability of a hard landing from the Fed’s actions increases if this trend continues. The July 2023 CPI Report will provide context to the impact of increasing energy prices for U.S. consumer inflation.
Key Trends
U.S. Private Manufacturing Construction Boom. From the U.S. Census Bureau’s June 2023 Construction Spending report, total construction spending increased 3.5% on an annual basis. The increase was driven by a 80.7% increase in private, nonresidential manufacturing and a 20.4% increase in public, nonresidential highway and street construction.
Earnings from construction-related companies are confirming this trend. In last week’s earnings, Caterpillar Inc., the world’s leading manufacturer of construction equipment, reported a 22% increase in sales & revenues (from Q2 2022) with total sales in Construction Industries increasing 19%.
Undoubtedly, an increase in government-sponsored investment tax credits have contributed to the increase in private manufacturing construction spend. To note, an investment tax credit is a federal tax incentive that allows individuals and firms to deduct allocated expenses for permissible projects from their federal tax liabilities.
A June 27, 2023 report from the U.S. Department of the Treasury (cited in this newsletter’s July 3, 2023 edition) states that the boom is “principally driven by construction for computer, electronic, and electrical manufacturing—a relatively small share of manufacturing construction over the past few decades, but now a dominant component.” The report cites a statistic from the Semiconductor Industry Association that “over 50 new semiconductor ecosystem projects have been announced in the wake of the CHIPS Act.”
Week Ahead
This week’s release of July 2023 Consumer Price Index (CPI) is the most anticipated economic data release. Other releases include consumer credit, NFIB Small Business Optimism Index, Producer Price Index (PPI), and Consumer Sentiment.
June 2023 Consumer Credit. Monday, August 7, at 3:00pm ET.
This data is released around the fifth business day of each month by the Federal Reserve and reports outstanding revolving and nonrevolving credit.
July 2023 NFIB Small Business Optimism Index. Tuesday, August 8, at 6:00am ET.
The National Federation of Independent Business (NFIB) releases the monthly Small Business Optimism Index, which provides an indication of the current state and health of small businesses in the U.S.
July 2023 Consumer Price Index (CPI). Thursday, August 10, at 8:30am ET.
The Consumer Price Index (CPI) measures the change in the price of goods and services from the consumer’s perspective. The CPI is a lagging indicator - an index that changes after the overall economy has started to follow a trend.
July 2023 Producer Price Index (PPI). Friday, August 11, at 8:30am ET.
The Producer Price Index (PPI) measures the change in the wholesale price of goods and services from the producer’s perspective. Consequently, the PPI can be a leading indicator for the CPI as producers typically pass rising costs to retailers and consumers.
University of Michigan’s August 2023 Surveys of Consumers. Friday, August 11, at 10:00am ET.
Investopedia states that the index is a monthly survey of how consumers feel about the economy, personal finances, business conditions, and buying conditions.
Q2 Fiscal Year 2023 earnings releases continue this week including KKR & Co. (KKR), United Parcel Service (UPS), Walt Disney Company (DIS), and Alibaba (BABA). Other notable earnings releases include IonQ (IONQ), commercial developer of quantum computing (Industry 4.0 player), AppLovin (APP), marketing and monetization solutions provider for apps, and Soho House (SHCO), a private members social club brand.
KKR & Co. (KKR). Before market open on Monday, August 7.
Palantir Technologies (PLTR). After market close on Monday, August 7.
United Parcel Service (UPS). Before market open on Tuesday, August 8.
Datadog (DDOG). Before market open on Tuesday, August 8.
Walt Disney Company (DIS). After market close on Wednesday, August 9.
Roblox (RBLX). Before market open on Wednesday, August 9.
AppLovin (APP). After market close on Wednesday, August 9.
Alibaba (BABA). Before market open on Thursday, August 10.
IonQ (IONQ). After market close on Thursday, August 10.
Soho House (SHCO). Before market open on Friday, August 11.
Disclaimer
This newsletter was written to provide investor information and education and should not be construed as a guarantee or investment advice. Under no circumstance should it be considered personalized investment advice. The publisher may have a long, short, or no position in any, or all, of the names that appear in the publication and may change at any time without notice. All information provided is for educational and general informational purposes only and is subject to change without notice.