Artificial intelligence is one of the bulls' biggest growth stories right now and Nvidia's Q2 earnings are expected to shed light on just how big the technology's profit potential might be. To say there is a lot riding on Nvidia's earnings would be a massive understatement. For those not familiar, Nvidia's chips power a majority of the AI gold rush in Silicon Valley, so their results will also provide insights into nearly the entire industry that is rapidly building around the technology.
One big risk is that the hype has possibly created unrealistic expectations and Nvidia's results and forward guidance end up leaving investors underwhelmed. Even worse, if the company's earnings disappoint, it could mean a bloodbath for the tech sector and in turn the wider indexes.
Beyond tech, stocks continue to struggle amid climbing long-dated Treasury yields. The yield on the 10-year Treasury note settled at 4.339% yesterday, up from 4.251% Friday and the highest since 2007. Many Wall Street insiders question how much higher stocks can realistically climb if bond yields keep charging upwards.
Bulls believe that upcoming inflation and jobs data will make a more convincing argument that inflationary pressures are easing and tamp down outlooks for further Fed rate hikes.
The key economic reports to watch include July PCE Prices next Thursday (August 31), the August Employment Situation next Friday (September 1), and August CPI on September 13.
Bulls are also hoping for some help from Federal Reserve Chair Jerome Powell on Friday when he delivers a speech at the Jackson Hole Economic Symposium.
Ideally, bulls would like Powell to focus more on how far inflation has fallen rather than on how much work the Fed might still need to do.
Housing data this week could also provide more signs of "disinflation" with shelter remaining one of the biggest contributors to sticky inflation. Existing Home Sales for July is due out today, followed by New Home Sales tomorrow.
In June, the median existing home price for all housing types was $410,200, the second highest of all time but down just under -1% from the all-time high a year ago. The year-over-year median new home sales price fell -4% in June.
Today also brings the Richmond Fed Manufacturing Index. On the earnings front, highlights include BJ's Wholesale Club, Dick's Sporting Goods, Lowe's, Macy's, Toll Brothers, and Urban Outfitters.
Oil Prices to Push Beyond +$90 by Year-End: Oil is poised to rally beyond +$90 per barrel by the end of the year amid record demand and tightening supply, according to UBS strategists. Concerns over China’s economy, the world’s second-largest consumer of crude, recently put pressure on crude futures. Data released Tuesday by China's National Bureau of Statistics added to concerns of a sluggish recovery as Beijing unexpectedly cut policy rates and withheld information on youth unemployment. Some investors remain skeptical that China’s latest stimulus efforts, a 15 basis-point cut to its one-year medium-term lending facility and a 10bps cut to the short-term 7-day reverse repo rate will be sufficient to revive demand, the UBS note said. However, UBS strategists don’t expect the price slide to persist amid firming fundamentals. Those include declining inventories and tight supply as OPEC+ production nears a two-year low. It's worth noting that Goldman Sachs analysts also recently reaffirmed their forecast of $93 per barrel for Brent crude and $86 per barrel for WTI by December, highlighting the market is less "pessimistic" about the global economy Source YahooFianance
American Workers' Wage Expectations Hit New Record High: The average reservation wage – the lowest annual pay that workers would accept to take a new job – increased to $78,645 in July, according to the New York Fed’s most recent Survey of Consumer Expectations. That’s up from about $72,900 a year earlier and $69,000 in July 2021. Pay expectations among women in the labor force rose 11% in the past year, twice as fast as for men, the survey found. Still, there’s a substantial gender gap when it comes to what’s an acceptable salary. For men the average reservation wage was about $91,000 — and for women it was $25,000 lower than that. Workers with a college degree now expect $98,600 annually to accept a new job, compared with an average $63,300 for those who don’t have one. Still, there are signs that the labor market is slowing. The Fed survey found that the average expected likelihood of receiving multiple job offers in the next four months declined to 20.6% from 25.7% a year earlier. One piece of bad news for employers in the Fed data is that US workers increasingly see the prospect of earlier retirements — suggesting the pool of available labor could shrink further. Source Fortune
Panama Canal Shipping Could Worsen Amid Historic Drought: The Panama Canal Authority has reduced maximum ship weights and daily ship crossings in a bid to conserve water. Ship owners have the options of carrying less cargo, shifting to alternate routes that can add thousands of miles to the trip or grappling with queues that earlier this month backed up 160 vessels and delayed some ships by as much as 21 days. The restrictions already are sending China-U.S. spot shipping prices up as much as +36%. Canal operators are on a tightrope as they work to manage maritime trade disruption and prepare for what is shaping up to be an even drier period next year, said Peter Sand, chief analyst at air and ocean freight rate benchmarking platform Xeneta. A naturally occurring El Nino climate pattern associated with warmer-than-usual water in the central and eastern tropical Pacific Ocean is contributing to Panama's drought. The area around the canal is experiencing one of the two driest years in the country's 143 years of keeping records, data from the canal authority and the Smithsonian Tropical Research Institute (STRI) showed. Rainfall measurements around the area are 30-50% below normal. A potential early start to Panama's dry season and hotter-than-average temperatures typical of major El Nino events in the country could increase evaporation from Gatun Lake and result in near-record low water levels by March or April 2024, said STRI's Steven Paton. Source Reuters
Car Prices Might Be Unsustainable for Buyers: Five years ago, there were a dozen models of new cars that sold for less than $20,000. In 2023, there was only one: the spartan Mitsubishi Mirage hatchback, which accounted for about 5,300 of the 7.7 million new vehicles sold in the U.S. in the first half of the year. For the average American, paying off a new car at current prices demands 42 weeks of income, according to data from Cox Automotive, up from around 33 before the pandemic. Bargains have been hard to come by on the used-car lot as well, where the average vehicle listed for about $27,000—up more than 30% from prepandemic levels, according to Cox’s data. Higher interest rates have made the situation more difficult for buyers. Today’s average new car loan has a monthly payment north of $750, with an interest rate of 9.5%. For used cars, the average rate is above 13.7%, according to Cox. These numbers could explain a mystery bedeviling auto lending. Seasonalized rates of severe delinquency for auto loans are the highest since at least 2006, but the jobs market is strong. Defaults and missed payments on pools of auto loans made in the first half of last year to people with subpar credit are matching or outpacing those issued in 2008, according to an analysis by S&P Global. The squeeze faced by borrowers might soon ratchet tighter, with a payment holiday for student loans set to expire at the end of the month. According to credit-reporting agency TransUnion, more than a third of consumers with student loans took on new auto loans during the pandemic. Source WSJ
Chip Company "Arm's" IPO Could Be Biggest of 2023: Arm, the chip designer owned by Japan’s SoftBank, filed for a Nasdaq listing on Monday, positioning itself to go public during a historically slow period for tech IPOs. The company wants to trade under the ticker symbol “ARM.” Arm reported $524 million in net income on $2.68 billion in revenue in its fiscal 2023, which ended in March, according to the filing. Arm’s 2023 revenue was slightly down from the company’s 2022 sales of $2.7 billion. The U.K.-based company filed confidentially for a listing in the U.S. earlier this year after previously announcing it would go public in the U.S. over the U.K., dealing a blow to the London Stock Exchange. Arm is one of the most important chip companies. It sells licenses to an instruction set at the heart of nearly every mobile chip, and increasingly, PC and server chips as well. SoftBank originally sought to sell Arm to chip giant Nvidia, but the deal faced major pushback from regulators, who raised concerns over competition and national security. SoftBank took Arm private in 2016 in a deal valued at $32 billion. Source CNBC
Everything & Everyone Underperforms Eventually: The rise in interest rates has led to a slaughter in long-term U.S. Treasuries. Even when we include the income earned on the bonds (which hasn’t been much in recent years), iShares 20+ Year Treasury Bond ETF (TLT) is in the midst of a 40%+ drawdown. Losses of this magnitude can erase years and years of gains. We’re now closing in on a lost decade for long-term bonds. This is a new phenomenon in recent decades. Before interest rates finally started to rise of late, long-term bonds were in the midst of one of the greatest bull markets of all-time. In the 25 years ending in March of 2020, long-term bonds had better annual returns than the S&P 500 — 8.2% to 8.0% — and they did so with one-third less volatility. All of these start and end dates were cherry-picked, of course, but for good reason. Everything underperforms at some point. You just don’t know when or for how long plus your start and end dates have a lot of say in the matter. Source A Wealth of Common Sense
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