Investors are highly anxious to see the Consumer Price Index (CPI) this morning. Wall Street economists expect July headline CPI increased to +3.3% from 3.0% in June while the "core" rate (strips out food and energy" remains flat at +4.8%. The gain in headline inflation is tied mostly to rising energy prices, a trend that has continued into August.

In the last month alone, gasoline prices have surged more than +8%. According to AAA data, the average price for a gallon of gasoline in the US is now $3.83 vs. $3.53 just a month ago. The average diesel price has jumped from around $3.82 last month to about $4.22 today. The rise is tied to OPEC oil production cuts as well as this summer's heat waves that constrained US oil refinery capacity.

Oil insiders are divided as to whether the seasonal drop-off in demand following the end of the summer driving season will help bring prices down this fall. Most believe price movement will remain dependent on production decisions by OPEC and the strength of the global economy, both of which are very tough to predict.

If energy prices continue to move higher, both consumer spending and the "disinflation" trend could be negatively impacted. There is also the threat of Atlantic hurricane season to consider, with peak activity typically occurring from late August through September.

While the Federal Reserve prefers inflation gauges that strip out volatile energy prices, rising fuel costs tend to eventually trickle out into other categories as companies try to recoup higher manufacturing and transportation costs. Bears are also pointing out that many of the drivers behind recent "disinflation" were one-offs and not likely to be repeated.

Bulls are - and have been for months - waiting for declines in "shelter" to start filtering into the official data. Shelter inflation as measured by CPI has been above +8% since early 2023 and it accounts for around 30% of the gauge. While real rent prices have come down, economists still aren't sure when the declines might start to register in the data. The big worry is that upcoming inflation data may start trending higher and reignite investor concerns that more Fed rate hikes lie ahead.

According to the CME FedWatch Tool, traders place the odds at 85.5% that the Fed at its upcoming September 19-20 meeting holds rates steady while odds are just 14.5% that the Fed will raise rates by another 25 basis-points. If inflation gauges start trending up and those odds flip, and it would deal a seriously blow to the bulls' narrative, especially the much-anticipated rate cuts that bulls are penciling for 2024.

On the earnings front, results are due today from Dillard's and US Foods. Dillard's will likely be closely watched as investors look for clues as to what other retailers might report. The bulk of major US retailers release Q2 results next week, including Target and Walmart. Just an FYI Walmart stock traded to a fresh all-time high yesterday at just over $162 per share. You talk about the ultimate buy and hold stock... Walmart offered shares for $16.50 on Oct. 1, 1970 for its IPO. A $1,000 investment could have purchased 60.61 shares of Walmart stock. Over the years, Walmart had had 11 2-for-1 stock splits, doubling the number of shares on each occasion. The 60.61 shares would have turned into 124,129.28 shares after the stock splits. The original $1,000 investment in Walmart stock at IPO would now be worth over +$20 Million! Also, since 1973, Walmart has paid a nice dividend every quarter, if that money would have been reinvested into the stock the total would be much higher. What a great run for investors who have stuck with this amazing blue chip stock!

Stagflation"... Why Some Say It May Soon Be Coming: Stagflation has almost disappeared as a talking point, and logically so as the economy keeps growing, and adding jobs, while inflation has decelerated from boiling hot levels. So it’s notable that a few new stagflation calls out there. The first is from Steen Jakobsen, chief investment officer at Saxo Bank, who in 2021 was among the early crowd forecasting a jump in inflation. What he calls “stagflation light” will begin in the fourth quarter, and really make a major impact in the first and second quarter next year, he says. Last week, the market reached “debt indigestion” as the U.S. Treasury stepped up its issuance of T-bills and announced an aggressive funding plan, he says. Simultaneously, the high deficit financing and cascading of issuance is coinciding with U.S. real rates rising to cycle high, Jakobsen added and then points out that the premise of modern monetary theory is endless financing but under negative real rates. Now we have positive real rates. Eureka! With the U.S. adding over $5 billion of debt every single day, it is extremely sensitive to funding from overseas. At the same time, the Fed is effectively trapped as it doesn’t want a 10-year Treasury yield of over 5%, but at the same time, it doesn’t want to lower rates because it’s dealing with a tight labor market. We have reached the point where the ‘cost of carry’ is growing exponentially because there is no outlook for either significant debt reduction or lower interest rates/inflation, says Jakobsen. Source Marketwatch

FHA Mortgage Interest Rate Hits 21-year High: Mortgage interest rates soared across the board last week, with the rate on the government’s low down payment option increasing to the highest level in 21 years. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 7.09% from 6.93%, with points rising to 0.70 from 0.68 (including the origination fee) for loans with a 20% down payment. The average rate for jumbo loans hit 7.04%. Source Yahoo Finance

Keeping an Eye on Natural Gas: Natural Gas prices popped higher this week triggered by reports that workers at important LNG plants in Australia were planning to strike. Keep in mind, the EU was the world’s largest LNG importer last year as it was forced to replace the lost Russian pipeline gas. Russia once met about 40% of the EU’s gas demand. Australia has become the vital supplier to Asia, which could put it into competition with Europe for available cargoes should the market tighten. A cut in Australian supply could mean Asian buyers step up buying from other sellers such as the US and Qatar.

Jet Fuel Prices Up +23% In August: With global crude oil prices comfortably above $80 per barrel, it was only a matter of a trading session or two before the uptick was reflected in the distillates market. But the visible spike in the price of one product - jet fuel - is not just down to Saudi Arabia and Russia's crude oil production cuts. According to International Air Transport Association (IATA) and S&P Global Commodity Insights data, jet fuel prices averaged $119.82 per barrel for the week ending Friday (August 4, 2023) compared to $97.78 for the week ending July 7, 2023. That's a near 23% rise in less than a month. The latest air passenger data and trends suggests much of the sentiment is being driven by the noteworthy buoyancy of the Asia Pacific air travel market. In a market update provided on Monday (August 7, 2023), the IATA noted that total global air traffic in June 2023 rose +31.0% compared to June 2022. Furthermore, global traffic at the end of Q2 2023 was at 94.2% of pre-COVID levels. For the first half of 2023, total traffic was up +47.2% compared to the year-ago period. And a regional break-up of figures indicates that airlines in Asia Pacific had a +128.1% increase in June 2023 traffic compared to June 2022. Furthermore, while growth in other regions may not have been quite as spectacular as that of the Asia Pacific region, it is nonetheless impressive. Carriers from Europe (+14%), Middle East (+29.2%), North America (+23.3%), Latin America (+25.8%) and Africa (+34.7%) - all posted growth for the comparable period. Source Forbes

Will China's Deflation Help Bring Down US Inflation? While the U.S. and other Western economies struggle to bring down high inflation, China is facing the opposite problem: a troublesome bout of deflation. Falling prices in China could help to depress inflation elsewhere, including in the U.S., but the positive impact is likely to be small. China’s National Bureau of Statistics reported Wednesday that consumer prices fell -0.3% year to year in July, the first negative reading since February 2021. Producer prices have been falling since late last year, and tumbled -4.4% last month on an annualized basis. China’s suppressed demand puts less of a strain on global supply chains, while falling manufacturing prices could lower the prices that American consumers pay for Chinese goods. But the effect on U.S. inflation likely will be limited, given that the U.S. consumer price index is heavily weighted toward housing, food, energy, and healthcare prices that generally aren’t heavily reliant on Chinese imports. Many economists expect the disinflation of shelter prices, specifically falling rents, to be an especially big driver in moderating U.S. inflation in the coming months. Source Barrons

American Cars Are Developing a Serious Weight Problem: The average weight of a new vehicle sold in the US last year was a whopping 4,329 pounds. That’s over 1,000 pounds higher than the average in 1980, and up about 175 pounds in just the last three years, a trend now exacerbated by the switch to electric models. This wave of vehicle bloat began in the 1980s, thanks in part to new safety regulations. Airbags, crash-test ratings and more robust structures packed on vehicular pounds, while better construction and stronger materials reduced engineers’ need to worry about weight. While some trucks got lighter in the past decade, the overall fleet average kept climbing as more suburban families traded their Toyota Corollas and Honda Accords for Ford F-150s and Chevy Silverados. Then came a push for better fuel economy and emissions reductions, a process that packed on more pounds and culminated in some of the heaviest vehicles yet: battery-powered ones. EV batteries add roughly +1,000 to +1,500 pounds for a long-range sedan or SUV. Roadways full of four-ton hunks of metal moving at sports-car speeds are also less safe. Adding +1,000 extra pounds to a vehicle increases the chance of fatalities in an accident by +47%, according to a study by the National Bureau of Economic Research. Source Bloomberg

Boeing Says Brazil Could be Top Sustainable Aviation Fuel Player: Brazil has the potential to become one of the major global players in sustainable aviation fuel (SAF), a Boeing executive said, as the sector attempts to meet its ambitious goal of reaching net-zero carbon emissions by 2050. The target agreed within the International Air Transport Association (IATA) representing airlines will largely depend on the development and increased production of SAF, which is made from renewable resources such as vegetable oils or waste. Securing enough SAF supply is the industry's biggest challenge in its push for net-zero emissions, amid high costs and slow production growth. The South American country is already a global leader in biofuels such as ethanol, made from sugarcane or corn, and soyoil-derived biodiesel. Source Reuters

Food Biz Bankruptcies Surging: A spate of recent bankruptcies upending the food and beverage space is likely just the beginning of the failures as more companies are expected to collapse in 2023 amid changing consumer tastes and challenges raising money to fund their cash-intensive businesses. This year has seen a meaningful uptick in bankruptcy filings. According to data compiled by New Generation Research for Food Dive, 85 food, beverage and tobacco companies have filed for bankruptcy through July 18, the largest number since the early days of the COVID-19 pandemic. In 2022, 61 companies filed for bankruptcy during the same period. Among the highest-profile businesses to file for Chapter 11 bankruptcy are plant-based food maker Tattooed Chef, which launched in 2018 and upcycling company Do Good Foods. Companies with ties to agriculture have been hit hard, too, with indoor agriculture companies AppHarvest, once valued at more than $3.5 billion, and AeroFarms, also filing. There are a host of reasons why food companies have suddenly found themselves in a difficult operating environment. Venture capitalists have become more selective in which companies they invest in, shifting their attention to profitable, established businesses. Source Food Drive

Disney Streaming Losses Subside but Subscribers Dwindle: Narrowing financial losses in Disney’s streaming unit helped it exceed expectations for profits during its latest quarterly earnings report released Wednesday afternoon, as the entertainment giant contends with turbulence while struggling to return profits to prior glory. Disney’s $22.33 billion of revenue and $1.03 earnings per share largely tracked consensus analyst estimates of $22.5 billion and $0.96, respectively, as tracked by FactSet. The conglomerate’s park and linear television units continued to beef up the bottom line, as the units’ $1.1 billion and $1.9 billion in quarterly operating profit were in line with expectations, respectively, while Disney bled $512 million in its flashier direct-to-consumer media business including Disney+, ESPN+ and Hulu, far below projections of a $758 million loss. The company reported a staggering 12 million decrease in Disney+ subscribers, though its subscriber loss in the U.S. and Canada was a milder 1%. Disney incurred $2.7 billion in restructuring costs during the quarter in which the company concluded its round of roughly 7,000 layoffs globally. Source Forbes

Dave Portnoy Buys Barstool Sports Back for $1: Dave Portnoy has once again become the owner of Barstool Sports, the sports blog he founded in 2003. Penn Entertainment, a casino-and-sports-gaming company, finalized its acquisition of Barstool earlier this year in a $551 million deal after acquiring a minority stake in the sports blog in 2020 for $163 million. Penn and Barstool agreed to go their separate ways as the gambling operator signed a new 10-year deal with ESPN to rebrand Penn's existing Barstool Sportsbook as ESPN Bet this fall. Penn has agreed to pay ESPN $1.5 billion as part of the deal and $500 million in warrants tied to media, marketing, and other services from ESPN, according to the announcement. A press release said that Penn sold 100% of the Barstool's common stock back to Portnoy "in exchange for certain non-compete and other restrictive covenants." A subsequent filing said the sale price to Portnoy was $1. Source Insider

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