ISM Non-Manufacturing yesterday showed an increase in both activity and prices, which is just the latest in a string of recent data indicating that the disinflation trend has stalled, and the economy may be picking up.
Bulls want to believe that recent inflation pressures are just temporary and stem mostly from rising energy prices. Bears argue that the bigger problem is "core" prices, which strip out food and energy and have been stubbornly stuck at more than double the Fed's target rate of +2% for nearly two years.
The services sector is a big contributor to core inflation but after falling earlier this spring, prices have now risen for two months in a row. Many economists think those pressures will continue and could effectively offset disinflation in other key areas.
The spate of stronger-than-anticipated economic data has led Wall Street insiders to walk back their expectations for rate cuts next year with most now somewhat uncertain if the Fed will cut rates in 2024.
The Fed in its most recent forecast projected its benchmark rate would end 2024 at a median 4.6% (a range of 4.50%-4.75%), versus the current target rate of 5.25%-5.50%.
Investors are highly anxious to see how/if this changes in the Fed's updated outlook, which will be released along with the Fed's policy decision on September 20. Obviously, the longer the Fed holds rates at higher levels, the greater the risks that companies and consumers alike run into troubles servicing their debts or that a financial "accident" can occur.
Tighter financial conditions also keep a lid on growth, which could in turn keep corporate earnings lower for longer. It also means bond yields, savings rates, and other financial tools tied to interest rates will remain higher and continue to compete with stocks.
Bottom line, until the data provides clear signs that inflation is no longer a threat, bulls may find it difficult to justify higher stock prices.
A lot of seasoned traders think the market is currently priced close to perfection and that the Fed really needs to stick the soft-landing if the markets going to move higher.
Today, the only economic data is Q2 Productivity and Labor Costs, while Toro is the earnings highlight.
Why the US Dollar Strength? Goldman Sachs asserts that despite a macroeconomic backdrop that generally supports a weaker dollar—namely, lower rate volatility, slowing yet solid U.S. growth, and positive risk sentiment—the risks look skewed towards a stronger dollar than most market participants anticipate. This is particularly true against major currencies like the JPY, CNY, and EUR. Keep in mind, since the greenback is considered a safe haven by most investors, the dollar has historically been negatively correlated to the outlook for growth in China, a key determinant of global risk sentiment and trade. Given the extent of the Chinese slowdown there are some inside the trade who think the US dollar has more room to run to the upside. Especially if the market is starting to maneuver ahead of the upcoming 2024 US presidential election, where all candidates are sure to take a tough stance against China. Let's also keep in mind, the US was the only G-10 economy recently to see upward revisions to economic growth forecast.
Regional Banks Are More Exposed to Commercial Real Estate Than First Thought: Bank OZK had two branches in rural Arkansas when chief executive officer George Gleason bought it in 1979. The Little Rock lender today has billions of dollars in commercial real-estate loans, including for properties in Miami and Manhattan, where it is helping fund the construction of a 1,000-foot-tall office and luxury residential tower on Fifth Avenue. Regional banks across the country followed a similar playbook, gorging on commercial real-estate loans and related investments in big cities over the past decade. With the commercial real-estate market now in meltdown, banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses. Bank OZK hasn’t pulled back from lending, but it has started to see some signs of market trouble. In January, a developer defaulted on a roughly $60 million loan from Bank OZK after construction costs escalated, the bank said. The loan was considered relatively safe because it was far below the building site’s value of $139 million in 2021. In December, a new appraisal put the property’s value at $100 million. Now, the bank is effectively stuck with the property. Source WSJ
+73 Million Americans Plan to Bet on NFL Games this Season: As legalized sports gambling expands across the U.S., a record 73.5 million Americans plan to wager on the NFL this season, according to the American Gaming Association’s latest survey on Americans’ betting plans released Wednesday. Last year, an estimated 46 million people bet on the NFL in the U.S., according to the AGA. The association said its survey found 19% of American adults plan to place a bet online, at a casino or with a bookie this year, up 56% from a year ago. Out of all U.S. adults, 35.1 million people or 14% plan to bet online, while 13.6 million or 5% plan to bet at a physical sportsbook. Self-identified NFL fans are expected to place more bets than ever this season, with 37% projected to place a wager. That’s up 42% from last year. The growth of legal gambling, and the ability for Americans to place wagers on their phones, has brought a flood of users to major players like DraftKings, FanDuel, Caesars and BetMGM. In 2021, the NFL signed five-year deals worth an estimated $1 billion combined with DraftKings, FanDuel and Caesars to become the league’s official sportsbook partners. Source CNBC
Warner Music Signs Record Deal with First AI Pop Singer: Teenage influencer Noonoouri has 400,000 followers on Instagram and has starred in fashion campaigns for Dior, Balenciaga, and Valentino. Now, she's been given a recording contract by Warner Music and is releasing her first single. But what makes it a first for Warner is the fact that Noonoouri doesn’t exist – she’s a metaverse avatar – and her voice is created by artificial intelligence (AI). The voice was based on a real singer but was altered to give Noonoouri her unique voice. The song itself, on the other hand, was very much created by humans. Although they don’t appear to be credited, Warner is reported to have said that they will be paid royalties the same as any other songwriter. For a music company like Warner, it’s easy to see the appeal. Noonoouri, the creation of artist Joerg Zuber, won’t get worn out from touring and promoting her music, and she can be restyled in seconds to keep in step with changing teen trends. However, there are real fears from musicians that the emergence of virtual artists and performers might make it harder for them to earn a living. Watch the music video for the first single, "Dominoes," Source Forbes
US Labor Department Sees Much Slower Job Growth Through 2032: US employment gains will slow significantly and be more concentrated across fewer sectors in the decade through 2032 as population growth moderates, fresh government estimates show. The Bureau of Labor Statistics sees the economy adding almost +4.7 million jobs, or +0.3% annually. That’s well shy of the +1.2% annual increase in the decade that ended in 2022. Estimated job growth would equal less than +40,000 jobs per month. Because of the aging baby-boom generation, population growth will be concentrated among individuals at least 75 years old. As older groups have lower labor force participation rates than prime-age workers, the overall participation rate is projected to decline as well. The labor force participation rate, currently at 62.8%, is projected to fall to 60.4% in 2032. Total US employment is projected to reach 169.1 million in 2032 from 164.5 million last year but the growth is expected to be concentrated in a few industries. The BLS anticipates that the health care and social assistance sector will add about +45% of all new jobs, due to an aging population. Professional and business services will add an additional +30%. Source Bloomberg
Aviation Fuel Subsidy Guidance to be Delayed Until December: President Joe Biden's administration likely will delay until December a decision on whether to make it easier for sustainable aviation fuel made from corn-based ethanol to qualify for subsidies under the White House's signature climate law, two sources familiar with the discussions said on Wednesday. The administration has been divided over the issue, which has prompted a fierce lobbying push from U.S. Farm Belt stakeholders that see sustainable aviation fuel (SAF) as crucial for the ethanol market's growth. Environmental groups, on the other hand, say clearing land to grow crops for fuel is counterproductive to curbing global warming. John Podesta, a senior White House adviser on clean energy, has been tasked with resolving the issue, Reuters reported in August. At the time, a White House official told Reuters that the administration's SAF policy seeks to include ethanol, but "we are trying to seek alignment with stakeholders on the question of modeling." At issue is a requirement in last year's Inflation Reduction Act (IRA) that SAF producers seeking tax credits must demonstrate with an approved scientific model that their fuel generates 50% less greenhouse gas emissions over its lifecycle than petroleum fuel. Source Reuters
There are Only 6 Bitcoin Billionaires: Almost half a billion people around the world have invested in some form of cryptocurrency—but only 22 of those investors have billions of dollars of those holdings. In its 2023 Crypto Wealth Report, published Tuesday, Henley & Partners said 210 million people globally were invested in Bitcoin by the end of June, while a total of 425 million held cryptocurrencies of some kind. According to the report, six—or almost one in three—of the world’s crypto billionaires reached that status by holding Bitcoin. That means just 0.000003% of those who hold Bitcoin have Bitcoin assets worth more than $1 billion. In the wider crypto space, 0.000005% of cryptocurrency investors’ assets are valued at more than $1 billion, according to the figures in the report. Investors were much more likely to have gained millionaire status than a 10-figure net worth via their crypto holdings, Henley & Partners said, with 88,200—or 0.02%—of the world’s crypto investors owning cryptocurrencies worth at least $1 million. Source Fortune
NFL Games are Shifting Away From Traditional TV: On any given Sunday, there will be more National Football League games available on streaming services than ever before — some even exclusively. The NFL season kicks off Thursday with the Super Bowl champions Kansas City Chiefs hosting the Detroit Lions. Since the season opener is considered a “Sunday Night Football” game on the schedule, NBCUniversal will air the game on both its broadcast network and streaming app, Peacock. This more aggressive shift toward streaming comes after several seasons of companies such as Paramount Global, Comcast’s NBCUniversal and Disney’s ESPN showing games simultaneously on streaming services and traditional TV. Now, media companies are bulking up their streaming platforms with more exclusive content in hopes of not only signing up more subscribers, but also locking them in as long-term customers. Later in the season, Peacock, along with Disney’s ESPN+ and Amazon, will have games that will be streamed only. Google’s YouTube TV and the NFL’s streaming service will also become bigger players in the streaming game. Source CNBC
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