Stock bulls are hoping today's August Producer Price Index (PPI) will mirror yesterday's Consumer Price Index with another slowdown in year-over-year "core" prices.

The core gauge, which strips out food and energy prices, fell in the CPI report to an as-expected annual rate of +4.3% from +4.7% in July. The headline rate, however, rose a bit more than expected to +3.7% versus +3.6% that many economists were looking for and up from +3.2% in July.

Not surprisingly, gasoline prices were the main driver of accelerating headline inflation, with pump prices up +10.6% in August versus last year. Meanwhile, the shelter index was up +7.3% year-over-year, accounting for over 70% of the total increase in core CPI.

Wall Street doesn't seem especially bothered by the rise in headline inflation, partially because it was expected but also because many believe high oil and gasoline prices will only be temporary. That I'm not so sure about. The Fed prefers to track core inflation that strips out energy prices but those costs can nonetheless feed into core consumer prices. In fact, a steep decline in transportation services - which are highly influenced by gasoline prices - has been a key factor in bringing down core inflation over the past year. Obviously, if gasoline costs start driving up transportation services costs substantially, that progress will be lost.

Keep in mind, the US is heading into refinery maintenance season, meaning gasoline prices are likely to rise further in some regions this fall. The US Energy Information Administration (EIA) also expects production cuts by OPEC+ will keep oil prices elevated at least through the end of 2023. The EIA does see demand steadily declining from now through 2024 (another thing I'm not so sure about) and forecasts Brent crude prices will be back around $87 per barrel by the second half of 2024. However, the International Energy Agency (IEA) said yesterday that the OPEC+ oil cuts "will drive a significant supply shortfall through the fourth quarter."

For what it's worth, the IEA forecasts substantially higher oil demand this year than the US EIA does. Even with energy prices currently putting upward pressure on headline inflation, most on Wall Street still expect the Federal Reserve will keep rates on hold at its policy meeting next week on September 19-20 with the CME Fed Watch Tool showing traders give 96% odds that officials maintain the current target rate of 5.25% to 5.25%. The odds are evenly divided as to whether they raise in November (49.6% hold vs 48.5% for a 25 basis-point hike) but the bigger concern is still how long the Fed will keep rates in "restrictive" territory and at elevated levels.

The longer the Fed feels the need to keeps its foot on the brake, the longer the drag will be on both economic and earnings growth. Aside from PPI today, investors are also anxious to see August Retail Sales which are expected to slow to +0.2% from July's increase of +0.7%.

On the earnings front, Adobe and Lennar are the highlights.

New Car "Options" Now Come With a Monthly Fee: The choices for car buyers are multiplying and now buyers must also decide which connected services they want to add. Automakers are embracing a new business model that requires paid subscriptions to unlock everything from entertainment options to enhanced navigation and hands-free driving. That's on top of regular monthly car payments. Ford recently announced new options for accessing its top-rated BlueCruise hands-free highway driving technology, where buyers can activate BlueCruise at the time of purchase for three years by rolling the $2,100 cost into the financing. Three years of General Motors' Super Cruise highway hands-free system costs $2,200 upfront on Chevrolet and GMC vehicles, $2,500 for Cadillacs, after which it's $25 a month or $250 per year via subscription. It appears that car buyers are open to subscription add-ons, if they get to try the services first, according to a recent S&P Global Mobility survey. It's difficult for buyers to fork over thousands of dollars at the time of purchase for technology features they're not sure they'll use, the survey found. 82% of respondents who had experienced a free trial or an existing connected service plan said they would "definitely" or "probably" pay for it on a future car. Automakers are savoring the prospect of collecting recurring revenue from car owners by transforming their vehicles into connected tech platforms but when everything becomes a subscription, it becomes overkill, says Yanina Mills, senior technical research analyst at S&P Global Mobility. Source Axios

Cash on the Sidelines Is Dwindling: Fund managers are holding less cash these days. Bank of America’s fund manager survey out this week—which encapsulates trillions of dollars in assets under management—found that the average manager holds about 4.9% of the portfolio in cash. That’s down from about 5.5% in the first half of this year and notably lower than a multi-decade high of 6.3% seen in October 2022. With holdings down, cash is now a neutral signal for the market and no longer a bullish one, BofA says. Cash holdings have declined partly because managers have already deployed some of those dollars in stocks, helping to drive the market higher. The S&P 500 has climbed +25% from its October 2022 bottom. The rising value of funds’ equity holdings has increased the weight of those positions in managers’ portfolios, while cash has gone down as a percentage of holdings. That’s why cash is now gradually moving from a factor that can push the stock market higher to something that could hold it back. Portfolio managers now have less cash to put to work in stocks, especially as the S&P 500 is more expensive. Source Barrons

Why Banks Aren’t Lending: As of the latest Federal Reserve weekly tally, overall loan growth at U.S. banks has been +3.6% on an annualized, seasonally adjusted basis so far in the third quarter—well below the long-term average of +7%, according to Autonomous Research analyst Brian Foran. Some of that reflects weakening demand for loans, thanks in large part to rising interest rates. It also reflects credit caution in some sectors, such as commercial real estate. Yet even if the economy were to stay strong, and consumers and businesses were to increase their appetites for borrowing, banks might still be reluctant to oblige. That is because banks will still be worried about ensuring the stability of their deposits. And they will be dealing with rising capital requirements from a set of new Federal Reserve proposals. For now, some banks have described themselves as being on a “diet” as they become much more selective about the risky lending and financing that they provide. Speaking at Barclays’ banking analyst conference this week, there was a common message: Attractively priced loans will be for the best customers. Source WSJ

August Inflation Breakdown in One Chart: Inflation rose in August on the back of higher gasoline prices, according to the consumer price index. Gasoline prices jumped +10.6% in August, following a +0.2% increase in July, according to Wednesday’s CPI report. The BLS adjusts those numbers for seasonal trends. Gasoline was the largest contributor to inflation in August, accounting for more than half of the increase, according to the BLS. While gasoline prices have risen in the short term, they’ve declined -3.3% from a year ago. For "core" CPI, housing was the largest contributor to the rise in core CPI in August, according to the BLS. Other “notable” contributors to inflation over the past year include motor vehicle insurance, with prices up +19.1% from August 2022; recreation, up +3.5%; personal care, up +5.8%; and new vehicles, up +2.9%, the BLS said. Conversely, some of the biggest deflators were airline fares, down -13.3%; TVs, down over -10%, and used cars and trucks, down -6.6%. Source CNBC

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China Denies Ban on iPhones or Foreign Devices: China has not instituted any laws or regulations prohibiting government employees from using or buying foreign phones, the Chinese Foreign Ministry said Wednesday, addressing media reports that said government staffers had been banned from using Apple iPhones. The Wall Street Journal and Bloomberg reported last week that staffers at key government agencies had been informally advised by supervisors in chat groups and meetings to not bring iPhones into the office or use them for work. The Journal reported that the instructions were given out verbally or in chat groups but that there was not formal guidance on the matter. The Foreign Ministry specifically denied the existence of any official policy barring foreign phone use but did not address the informal guidance reported by the Journal. Source CNBC

Arm Prices IPO at $52, Valuing Chip Designer at $55 Billion: Arm, the chip design firm that supplies core technology to companies including Apple and Nvidia, priced its IPO at $52 a share, according to a source familiar with the matter. Arm’s fully-diluted market cap, which includes outstanding restricted stock units, is about $55.5 billion at the $52 offer price. The British company is listing at least 95.5 million American depository shares on the Nasdaq, and SoftBank, its current owner, will control about 90% of the company’s outstanding shares. The offering is priced above Arm’s expected price range of $47 to $51. The company will start to trade on Thursday under the symbol “ARM.” Arm said in its prospectus that revenue in its fiscal year that ended in March slipped less than 1% from the prior year to $2.68 billion. Arm reported $524 million in net income, down -22% from 2022. Source CNBC

Ring's New Pet Tag Helps Reunite Lost Pets with Owners: Amazon-owned Ring is launching a new Pet Tag accessory that is designed to help reunite lost pets with their owners, the company announced on Wednesday. The accessory essentially puts a QR code on your pet’s collar that can be scanned in order to help get them back home if they are ever lost. Once scanned, the QR code notifies you that your lost pet’s tag has been scanned. Scanning the QR code will display the information that you have logged in your Pet Profile, such as health conditions, that can help someone who may find your pet best understand your pet’s immediate needs. If you have opted in to the “Contact Me” feature via your pet’s Pet Profile, the person who finds your pet can engage in two-way communication with you to facilitate the return of your pet. It’s worth noting that the Pet Tag doesn’t have any GPS features, so the accessory alone can’t be used to geolocate a lost pet. The Pet Tag instead essentially replaces a pet collar that lists your personal information in order to get in contact with whoever finds your pet. Source TechCrunch

NFL Players Association Requests Natural Grass Fields Following Aaron Rodgers’ Season-Ending Injury: The NFL Players Association has called on the league to switch all of its field surfaces to natural grass, suggesting natural grass is “simply safer” than artificial turf, after quarterback Aaron Rodgers suffered a season-ending injury on Monday during his debut for the New York Jets, which features artificial turf in its home stadium. Issues surrounding artificial turf at stadiums have “been near the top of the players’ list,” according to Lloyd Howell, executive director for the NFLPA, who said he has previously raised concerns with the NFL. A study published in 2019 by the American Journal of Sports Medicine found that playing on artificial turf resulted in a +16% increase in lower-extremity injuries per play compared to natural grass. Another study published last year by the University of Hawaii suggested that athletes playing on artificial turf may experience a greater risk of suffering a concussion than on grass. The NFLPA—citing injury data collected from 2012 to 2018—released its own report, which indicated players were +28% more likely to suffer non-contact lower-extremity injuries on turf than on grass. Source Forbes

Top US CEO's Pulling Back on Hiring Plans: Few of America's top corporate leaders expect to add jobs in the coming months, and many expect to cut positions. That presages a slowdown in what has been a blistering-hot labor market. In a new survey from the Business Roundtable, whose members are CEOs of major U.S. companies, only 27% expected to increase their U.S. employment in the next six months, down from 33% in June and 47% a year ago. Some 32% of the CEOs anticipated a decrease in their employee headcount, up from 27% in June. The deteriorating hiring plans were enough to pull the overall CEO Economic Outlook index down 4 points to 72, a level that implies sluggish growth but not a recession (the long-term average is 84). The executives' outlook for sales and capital spending were basically flat, which suggests business conditions are holding up overall even as executives reevaluate what were once more ambitious hiring and staffing plans. "With an economy that is slowing, not stalling, CEOs continue to moderate their plans and expectations for the next six months, particularly in employment," Business Roundtable CEO Joshua Bolten said. Source Axios

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