Stock market volatility returns amid renewed worries about the health of US banks and China's economy. Wall Street seems to have been caught off guard by a ratings downgrade of several US banks, courtesy of credit ratings agency Moody's earlier this week.

Most of the banks were small and mid-sized and add to the concerns that began earlier this year about bank balance sheets after two institutions collapsed. The reasoning behind Moody's downgrades is nothing Wall Street was not already aware of - banks are under pressure from declining deposits, higher interest rates, and worsening bond values, and perhaps a strained commercial lending department. But as Moody's pointed out, the move was "largely a profitability story - we are not raising major concerns that the system is majorly undercapitalized or underfunded." Meaning the downgrades are about profit potential, not financial stability.

The downgrades could raise borrowing costs for some banks and further dent their bottom lines but overall they don't really change the outlook for the broader stock market.

On that front, China's ongoing economic slump is a bigger worry for investors after the country reported worse-than-expected trade data and now seems to be falling into a deflationary spiral. Both imports and exports dropped by double-digits in July with exports declining at the fastest pace (-14.5% year-on-year) since the beginning of the Covid pandemic in early 2020. At the same time, China's economy has tumbled into a deflationary environment, and is fueling calls for more government stimulus at a time when policymakers are also confronting a property sector slowdown and weakness in trade.

Bottom line, China might struggle a bit longer than many had anticipated. Remember, most were thinking the Chinese economy would rebound strongly after lifting their pandemic restrictions. There were some early signs of growth and strength but that soon fizzled out. Here at home, most bulls are hoping further slowdowns in the Consumer and Producer Price Indexes - due on Thursday and Friday respectively - will reignite optimism about an end to Fed rate hikes and get the rally back on track.

Many Wall Street insiders are worried that seasonality could become an increasing headwind going forward. Historically, August ranks as the third worst-performing month for stock indexes going back to 1950, while September ranks as the worst, which means we could be in for a bumpy ride over the next 60 to 90 days.

Keep in mind, earnings wrap up in a couple of weeks and the next Federal Reserve meeting is not until September 19-20, with not much happening in between. Meaning bulls could struggle to gain ground amid a lack of fresh new headlines. The Kansas City Federal Reserve's 2023 Economic Policy Symposium, aka "Jackson Hole," will be held on August 24-26, but most analysts doubt Fed officials will provide any new insight or information.

There is also another "government shutdown" threat looming at the end of September which could further dampen investor optimism. Market volatility over shutdown dramas usually starts to spike the closer Congress gets to the deadline, which in this case is October 1.

Today, investors will be digesting earnings from Disney and Roblox. There is no economic data of note.

China to Lose Nearly 50% of Its Population By End of Century... which will have a direct impact on its ability to compete with the US and other nations on the world stage, according to a report from consultancy firm Terry Group. Researchers say it's not only overall population decline that poses a threat, but the climbing proportion of elderly people. In 1990, 5% of Chinese people were 65 or older. That's nearly tripled to 14% today, and the Terry Group anticipates the cohort making up 30% of the population by 2050. These skewed proportions are pushing China's overall dependency burden back up, the authors wrote. In 1975, there were thirteen times as many children as elderly in China. By 2050, the UN projects that there will be twice as many elderly as children. This year, China's population shrank for the first time since 1961, Chinese government data illustrate, and Terry Group researchers highlighted that old-age dependency burdens are climbing, which amount to a demographic gauntlet. Source Business Insider

GM’s Ultium-Based EVs to Power Your Home By 2026: Owners of all-electric Chevrolets and other GM brands will soon be able to use their cars as backup generators to power their homes during an outage or during peak demand days. GM said Tuesday it is bringing its vehicle-to-home bidirectional charging technology to its entire lineup of Ultium-based electric vehicles by model year 2026. Ultium is GM’s new electric platform that includes a new battery design and serves as the foundation for the automaker’s EV plans and supports a range of future vehicle models.Wade Sheffer, vice president of GM Energy, said in a statement that by integrating V2H across our entire Ultium-base d portfolio, we are making this groundbreaking technology available to more consumers, with benefits that extend well beyond the vehicle itself, and at broader scale than ever before. The first vehicles to receive the technology will be the 2024 Chevrolet Silverado EV RST, the 2024 GMC Sierra EV Denali Edition 1, the 2024 Chevrolet Blazer EV, the 2024 Chevrolet Equinox EV, the 2024 Cadillac Lyriq and the upcoming Cadillac Escalade IQ, which has a reveal date set for August 9. Source Techcrunch

Change Your Name to "Subway and Get Free Sandwiches for Life: The hunger is real. Subway announced yesterday that +10,000 individuals said they would legally change their name to "Subway" to receive free sandwiches for life from the quick-serve chain — and did so within 96 hours of the original offer being unveiled. Now, one winner will be selected later this month, Subway said. In addition to the sandwiches, the winner will receive money to reimburse legal and processing costs to complete the name change process. Subway is also in the process of finding a buyer, most likely a private equity firm, according to multiple media reports. Reuters reported last week that the chain could fetch as much as $9 billion and that any sale would be completed by the end of August. Founded in 1965 and still currently owned by its founders' families, Connecticut-based Subway has more than 37,000 restaurants in over 100 countries. What a success story! Source NBC News

Moody's Cuts Ratings of 10 US Banks, Adds Big Names to Downgrade Watch: Moody’s cut the credit ratings of a host of small and mid-sized U.S. banks late Monday and placed several big Wall Street names on negative review. The firm lowered the ratings of 10 banks by one rung, while major lenders Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust are now under review for a potential downgrade. Moody’s also changed its outlook to negative for 11 banks, including Capital One, Citizens Financial, and Fifth Third Bancorp. Among the smaller lenders receiving an official ratings downgrade were M&T Bank, Pinnacle Financial, BOK Financial, and Webster Financial. Moody’s analysts Jill Cetina and Ana Arsov explain in an accompanying research note that "many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital." They also pointed to the possibility of a "mild US recession" in early 2024 and an expected decline in asset quality "from solid but unsustainable levels, with particular risks in some banks’ commercial real estate (CRE) portfolios.” Source CNBC

Inflation Is Cooling, so Why Are Prices Still High? For all the talk that US inflation is cooling, it sure doesn’t feel like anything is getting cheaper. That’s because most things aren’t. Inflation is expressed as a rate of change, and it is true that prices are in fact growing at a slower rate — what’s known as disinflation. But to the average American, their lived experience is that everything is more expensive than it used to be, and that won’t change until there’s outright deflation. While the consumer price index captures the headline rate of inflation, the Bureau of Labor Statistics also publishes a separate report of average price data that reflects what Americans are actually paying. Basic items like ground beef and potato chips now cost dollars more on average than they did before the pandemic, the BLS price data show. Gasoline prices are rising again and the costs of electricity and a variety of other everyday essentials remain elevated. Grocery prices have fallen in three of the last four months, based on the CPI data. Still, since February 2020, when the pandemic began, the cost of food at home is up more than +23%. Source Axios

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Apartment Buildings Emerging as Next Major Trouble Spot: Apartment buildings, long considered a real-estate haven, are emerging as the next major trouble spot in the beleaguered commercial-property world. Investors bid up the prices of multifamily buildings for years, attracted by steadily rising rents and the prospect of outsize returns. Many took on too much debt, expecting they could raise rents fast enough to pay it down. The apartment sector’s main problem isn’t a lack of demand—rents have soared since 2020—it is interest rates. The sudden surge in debt costs last year now threatens to wipe out many multifamily owners across the country. Outstanding multifamily mortgages more than doubled over the past decade to about $2 trillion, according to the Mortgage Bankers Association. That is nearly twice the amount of office debt, according to Trepp. The data provider adds that $980.7 billion in multifamily debt is set to come due between 2023 and 2027. Mortgage delinquencies in the multifamily category are low but increasing. Most apartment loans are fixed-rate, long-term mortgages. During the pandemic, however, investors took out more shorter-term, floating-rate loans. But few anticipated that interest rates could rise so quickly, pushing down building values and forcing landlords to refinance at much higher rates. Regional banks, a crucial source of funding, are lending far less today, making it harder to refinance mortgages. Source WSJ

Everyone Wants to Work at UPS After Teamsters Deal: United Parcel Service Inc. has become a hot employer since its union last month secured $30 billion in new money over a five-year contract. Online jobs board Indeed Inc. saw a more than 50% increase in searches with “UPS” or “United Parcel Service” in the job title the week after the deal announcement, according to data shared with Bloomberg News. The trend doesn’t appear to be industrywide, as searches for “delivery driver” didn’t see similar spikes. “UPS driver jobs near me” has also been a top trending search on Google in the two weeks since the deal was reached. To head off a potential strike, on July 25 UPS agreed to boost starting wages for part-time workers to $21 an hour and improve working conditions, including adding air conditioning in new vehicles. The results of the ongoing ratification vote will be announced on Aug. 22. The news might not be as moving for shareholders. On Tuesday, UPS lowered its full-year profit forecast, in part due to rising costs after the tentative labor agreement. UPS said the guidance change was “primarily to reflect the volume impact from labor negotiations and the costs associated with the tentative agreement.” Source Bloomberg

Nvidia Reveals New AI Chips: Nvidia announced a new chip designed to run artificial intelligence models on Tuesday as it seeks to fend off competitors in the AI hardware space, including AMD, Google, and Amazon. Currently, Nvidia dominates the market for AI chips with over 80% market share, according to some estimates. The company’s specialty is graphics processing units, or GPUs, which have become the preferred chips for the large AI models that underpin generative AI software. But Nvidia’s chips are in short supply as tech giants, cloud providers and startups vie for GPU capacity to develop their own AI models. The new chip will be available from Nvidia’s distributors in the second quarter of next year, Huang said, and should be available for sampling by the end of the year. Nvidia representatives declined to give a price. Source CNBC

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