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On SpaceX, Copper & Semiconductors
Have SpaceX investors gotten altitude sickness? As SpaceX, the company, continues to shoot for the moon, SpaceX, the stock, has been spiraling. Jackie examines both Elon Musk’s lofty ambitions for the company and investors’ down-to-earth concerns. … Also: The huge data center buildout is driving up demand for the materials used, from construction machinery to metals. Their pricing reflects the soaring demand. So does the Q2 earnings report of copper producer Freeport-McMoRan. … And in our Disruptive Technology segment: The challenge of making semiconductor chips more efficient.
US Economy Is Fine & The Fed Should Be Turning More Hawkish
I. Macro The economy's two most important engines of economic growth, consumer spending and business investment, are booming. In Q2-2026 real GDP, consumption expenditures increased 3.3% (saar) and nonresidential fixed investments jumped 8.4%. The headline and core GDP deflators, the most comprehensive measures of economy-wide inflation, rose 4.3% y/y and 3.8% (chart). Fed officials should be turning hawkish. Recent Q2 earnings reports were upbeat on consumers. Booking Holdings maintained its full-year outlook and reported solid travel demand despite higher airfares and geopolitical turmoil. Disney also delivered better-than-expected results, with strong performance at its parks and experiences business. Bank of America expects hyperscaler capital expenditures to reach $860 billion this year and approach $1.2 trillion in 2027. The AI buildout has turned into its own stimulus program for the economy. And, of course, the government deficit remains very stimulative. Fed officials appear to be dividing into two camps. One camp views rate hikes as necessary only if inflation fails to fall closer to 2%. Recent comments from Philadelphia Fed President Anna Paulson and Fed Governor Lisa Cook fit broadly into this category. Paulson said she is keeping an "open mind" about whether current monetary policy is sufficiently restrictive. Cook reiterated that she is prepared to act if inflation fails to cool.The other camp wants to hike the federal funds rate sooner rather than later. They include the three dissenters at the FOMC's July meeting. Recent comments from Minneapolis Fed President Neel Kashkari (one of the dissenters) and Kansas City Fed President Jeff Schmid reflect this hawkish view. Kashkari said additional hikes this year are "not impossible" and that "now is the time to start slowly moving up." Schmid argued that "bringing inflation down to the Fed's 2% objective will require tighter policy." He does not view current policy as restrictive. This camp worries that five years of above-target inflation, ongoing supply shocks, and strong economic activity could cause inflation to remain stuck above the Fed's 2.0% inflation target. Financial markets are siding with the more hawkish camp. The 2-year US Treasury note yield remains well above the federal funds rate (chart). The latest economic developments confirm that the upside inflation risks exceed the downside risks to the economy: (1) Employment. On May 7, we wrote that the labor market was likely to improve in the spring and that employment-related stocks might have bottomed. So far, so good. Labor market conditions have improved from the winter months, while the stock prices of ADP, Paychex, and ManpowerGroup have rebounded (chart). Today’s July ADP jobs report showed private employers added 44,000 jobs, down from 95,000 in June (chart). Even so, the three-month average remained at a solid 87,000, a pace that should keep unemployment low (chart). We expect jobs growth to get a lift from the AI investment boom, particularly in manufacturing and construction. We acknowledge that this scenario did not get confirmed by the latest ADP report. (2) Employment Cost Index (ECI). The ECI rose 3.8% (saar) during Q2 and 3.3% y/y, remaining relatively stable (chart). These figures support our view that the labor market remains well balanced. There is no wage-price spiral currently, as there was in 2021 and 2022. ECI wage and salary growth slowed to 3.1% y/y, closer to its pre-pandemic readings (chart). Benefits increased 3.8%. (3) Nonmanufacturing Purchasing Managers. The services PMI edged up to 54.1 in July, as business activity rose to a five-month high and new orders strengthened (chart). The expansion is broad based, with 13 industries reporting growth. The services prices-paid index rose to 70.3 in July, while the manufacturing counterpart remained elevated at 71.1 (chart). These are relatively hot readings. II. Markets The price of gold seems to have found support at $4,000 per ounce in recent days (chart). It rose sharply today and continues to advance this evening. That's giving us more confidence in our year-end target of $5,000. Then again, the latest move higher suggests that gold traders don't agree with our hawkish spin on Fed policy. Today's economic data might have convinced them that the Fed is less likely to raise rates anytime soon. That view was confirmed by the modestly weaker dollar. We are counting on central bank buying to boost the price of gold even if the Fed tightens and the dollar strengthens. After the strong tech-led rally during Monday and Tuesday, the S&P 500 edged down slightly today (chart). The three strongest sectors are among our overweight recommendations. So is Energy, which was weak today on news that Iran and Oman have agreed on precise geographic coordinates for a joint shipping lane through the Strait of Hormuz, enabling 60 days of fee-free commercial transit.
Mostly About AI & A Little Bit About China
Investors have become increasingly discerning when it comes to buying the AI hyperscalers’ stocks. Instead of investing on faith, they’ve been assessing company by company whether future demand might be huge enough to justify the massive capex devoted to data center buildouts. Today, Melissa shares her analysis and reassuring conclusions, informed by individual companies’ capex plans and their revenues expectations based solidly on presold compute contracts. … Also: William discusses the Chinese government’s vigorous defense of its export-heavy economic model. President Xi’s swagger doesn’t bode well for the trade talks he’ll soon be having with President Trump and European leaders.
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