Powell's speech will come Friday morning when he addresses the annual Jackson Hole Economic Symposium. The event is hosted by the Kansas City Federal Reserve and brings together central bankers, policymakers, academics, and economists from around the world. Bulls are hoping Powell will strike a more "dovish" tone and help tamp down fears that the central bank will raise rates in the months ahead.
Much of that worry stems from inflationary pressures that have reignited in the energy and food sectors and which economists warn could work to keep inflation stubbornly above the Fed's +2% target rate.
That's on top of a still-tight labor market and indications that wages are starting to rise again. Stock bulls have been alarmed by the recent surge in "real" interest rates - nominal rates minus the rate of inflation - as lenders and traders alike bet that the Fed will hold rates higher for longer. "Real" interest rates create a significant burden for would-be borrowers. Longer-term yields are one of the most powerful influences on business investment. If borrowing costs are high and look set to remain that way, companies may scrap plans for growth and start downsizing payroll.
New consumer home and car loans are similarly pressured, impacting all the businesses that rely on that commerce. A resurgence in bond yields is also making returns on interest rate-based investments even harder to ignore in a stock market that many feel is over valued. Money-market funds have seen yields soar to north of +5%, the highest levels since 1999. Basic savings accounts at many banks are paying more than +4%. These rates are great for savers and money managers pursuing less-risky asset allocations but they threaten to lure money away from stocks.
Money-market funds in the week ending August 16 saw inflows of nearly $36 billion, the highest since May of 2022. Bulls are hoping Powell's speech will lean more "dovish" and focus on the progress the Fed has made against inflation so far, which they would take as a sign that the central bank is trying to relieve some of the pressure on longer-term rates and avoid financial conditions becoming overly restrictive.
Bulls may also view a more "dovish" Powell as an indication that the Fed overall is growing concerned that interest rate hikes are at risk of doing more harm than good. Bears believe Powell wants to avoid getting investors too bulled up and will likely reiterate the central bank's intentions to keep rates high for "as long as it takes," even if it means slower economic growth and higher unemployment.
The other major event this week is Nvidia's earnings on Wednesday, which many analysts consider the first big test of artificial intelligence technology and its profit-generating potential. Nvidia in its Q1 earnings call at the end of May forecast $11 billion in revenue for Q2, which helped fuel the massive tech rally this summer. Nvidia's share price has since climbed more than +40%, and year-to-date has more than tripled. The stock trades at a whopping 42 times forward earnings, according to FactSet, versus the S&P 500 index that trades at around 18.6 times earnings. Nvidia has no doubt set a high bar for itself but many Wall Street bulls expect the company will blow its own forecast out of the water. Even if it does, many seasoned investors question how much further Nvidia and other tech stocks can climb from already very expensive levels. In fact, some are positioning for a sell off after Nvidia reports with big money expected to book profits while they can and retreat to the sidelines amid the rising tide of uncertainty.
Let's also not forget, the hammer could soon be coming down on some of the world’s biggest tech companies. Meta, Apple, Alphabet’s Google and other large tech companies will by next week start facing the first wave in a storm of new European Union tech rules that come into effect over coming months, marking the largest expansion in digital regulation ever in the West.
Remember, it was tech that lead us on the way up...
Capital One Unloading More "Office Loans" as Property Sector Wobbles: Capital One Financial Corp. confirmed another big sale of nearly a billion dollars worth of office loans as fallout in the sector intensifies in the face of higher interest rates and tumbling property values. Distress in the office sector has been a key concern of U.S. banking regulators, including at the Treasury Department and the Federal Reserve, as landlords struggle to finance maturing debt with the central bank’s benchmark rate at a 22-year high. Capital One reported having roughly $3.6 billion in commercial real-estate loans classified as “held for investment” in the first quarter but moved $888 million into its “held for sale category in the second quarter while recognizing a $361 million charge-off as part of the transfer. Source Marketwatch
Child-Care Prices Are Rising at Nearly Twice the Overall Inflation Rate: The national average price of daycare and preschool services rose +6% in July from a year before, the Labor Department reported recently. That was nearly double the overall inflation rate of +3.2%, which was down from its recent peak of 9.1% in June last year. Parents could see their child-care bills climb higher this fall as providers boost tuition to cover rising costs and federal pandemic aid ceases. Daycare and preschool services are among many basic household expenses still rising briskly this year, including food (up +4.9% in July from a year earlier), electricity (up +3.0%) and motor vehicle insurance (up +17.8%). Rising child-care tuition also shows how past inflation in many categories—such as wages, rent and utilities—ripples through the economy today as businesses reset their prices to catch up. Many providers also lose federal financial aid next month with the expiration of the $24 billion Child Care Stabilization Program, which was created in 2021 to help them pay their bills and stay open during the pandemic. By the end of last year, more than 220,000 child-care providers serving as many as 9.6 million children had received such funding. Source WSJ
Over 25,000 New Pickleball Courts are Needed to Keep Up with Demand: America's hottest sport is growing so quickly that the US will need to build thousands of new courts — 25,784, to be exact — in the coming years to keep up with demand, a new report found. Pickleball — which is a mix of tennis, ping-pong, and badminton — had 8.9 million players in 2022, an +85% increase from 2021, and is the fastest-growing sport in the country, according to the State of Pickleball: Participation & Infrastructure Report. For context, there are currently 51,937 pickleball courts across more than 12,000 facilities in the US, per the report. To satisfy the growing interest in the sport, courts have sprung up in abandoned big-box stores at malls and been built on existing courts intended for other sports, like basketball and tennis. "It's almost like the gold rush — who's gonna get their footprint faster," Jorge Barragan, CEO of pickleball court operator The Picklr, told Insider. The average age of a pickleball player is 35 years old, according to the report. While the largest number of players are between 25 and 34 years old, the sport is equally popular among those 18 to 24 years old and those 65 and older. Source Insider
Opioids Viewed as Greatest Threat to US Public Health: As a new Covid variant emerges, the public is split on the level of concern they have over the recent uptick in cases, according to the latest Axios/Ipsos American Health Index. This growing concern, however, is not translating into behavior change, as the number of Americans who report wearing a face mask in public continues to decline from earlier this year. Covid is also at the bottom of the list of what Americans view as the #1 threat to public health at the moment. The top current threats are opioids and fentanyl, and obesity. At this moment, 26% say opioids and fentanyl are the #1 public health threat, unchanged from the last two polls. Another 23% say obesity, also consistent with previous surveys. Source ISOS
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