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On Retailers, Insurers & AI Scientists
The tides of consumer spending have shifted toward clothing and household goods and away from cars, homes, and casinos. At least that’s what the ytd performance stats of industries in the S&P 500 Consumer Discretionary sector indicate, Jackie reports. Supporting that narrative: A glowing management update from Target, which reported better-than-expected results this week. … Also: A look at the federal investigation into TWG Global’s companies. Could it be the first of many issues with insurers owned by large money management firms? … And: Claude and Rosalind don lab coats to help advance science.
Bessent's Put For The Bond Vigilantes & More On Fed's Hawks vs Owls Debate
I. The US Treasury Today, the US Treasury announced it is at least doubling its liquidity-support buyback operations for longer-dated government debt. Long-end yields fell sharply after this morning's release (chart). Treasury Secretary Scott Bessent is signaling that he will do whatever it takes to keep a lid on bond yields. His message to the Bond Vigilantes: "You folks aren't the only players in the bond market." On November 1, 2023, Treasury Secretary Janet Yellen sent the same message to the Bond Vigilantes when the Treasury announced plans to finance more of the swelling federal government deficit with Treasury bills (chart). That reversed the yield spike that saw the 10-year Treasury yield soar from 4.00% in early August to 5.00% at the end of October that year. Apparently, Bessent is relying on Yellen's playbook given that marketable Treasury bills held by the public rose $1.0 trillion over the 12 months through July. Treasury buybacks are structured to repurchase older, less liquid ("off-the-run") government bonds from primary dealers, freeing up dealer balance sheets and improving secondary market functioning. Here are the details of today's announcement: The Treasury has the tools to influence the shape and level of the yield curve to some degree. Bessent intends to use them to counter any serious attempt by the Bond Vigilantes to push yields higher. II. Financial Markets The 10-year yield fell from 4.71% to 4.65% today. Fears of spiking to 5.00% abated rapidly. The S&P 500 edged up 0.2% (chart). The index's Health Care sector jumped 3.5% as Moderna shares surged sharply following landmark Phase 3 clinical trial results for its investigational mRNA cancer therapy developed in partnership with Merck. The Financials and Information Technology sectors fell slightly today. In other words, the stock market's relief rally was muted. That's because the July FOMC minutes were released today. They had a hawkish tilt. Gold, on the other hand, rallied by more than $130 per ounce back to its 200-day moving average (chart). Our year-end target is still $5,000. The drop in yields pushed the US Dollar Index lower (chart). III. The Fed The July FOMC minutes support our view that the Committee is divided between hawks and owls. Hawks are likely to favor another hike in September, while owls want more evidence on inflation's persistence before deciding what to do next. Here are six key takeaways: (1) The hawks are digging in. The minutes revealed a sizable hawkish bloc. Hammack, Kashkari, and Logan dissented in favor of an immediate 25bp hike in July, while others also supported tightening. They argued that "price pressures appeared broad-based" and that the Committee "should adopt a more restrictive policy stance" to ensure inflation returns to target. Some argued that acting sooner could "help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage." (2) There are no doves. Hawks believe inflation persistence is already evident and favor hiking now. Owls share the same concerns but prefer to wait for more evidence. Unlike doves, they remain focused on inflation and are willing to tighten if needed. The minutes showed no appetite for rate cuts, with the debate centered on whether to hike now or wait. (3) Inflation keeps finding new reasons to stay elevated. Participants noted that inflation risks remain "skewed to the upside" and that "successive supply shocks have repeatedly delayed the expected return of inflation to 2 percent in recent years." The Middle East conflict, tariffs, and AI-related demand pressures were cited as causes of inflation's persistence, while years of above-target inflation risked influencing inflation expectations and wage- and price-setting behavior. (4) The economy is giving the Fed little reason for concern. Participants said activity had "continued to expand at a solid pace," supported by "strong business investment and resilient consumer spending." Labor market conditions were viewed as "stable, with labor demand and supply in balance," while some noted they had even "strengthened modestly." Strong AI-related investment, healthy credit availability, supportive financial conditions, and positive wealth effects reinforced the view that the economy remains resilient. (5) AI is increasingly seen as an inflationary force. AI was discussed as a macroeconomic force affecting investment, labor markets, inflation, and financial stability. Participants observed that AI-related industries were generating "strong demand for skilled workers, including electricians, machinists, and engineers, leading to notable increases in their wages," while others argued that AI investment was already "pushing up aggregate demand." Productivity gains could eventually ease inflation pressures, but the timing remained uncertain. (6) Warsh wants fewer meetings. Fed Chair Kevin Warsh suggested "six scheduled meetings per year, held roughly every two months," down from eight currently, and emphasized that he had "asked for input from the Committee on these issues." No decision was made. The discussion also included balance-sheet policy, though many participants reiterated that the federal funds rate should remain the primary policy tool.
On AI’s Impact On Jobs, Bessent’s Iran Options & More FEMO
AI usage in the workplace is starting to become commonplace. As adoption rises, will companies enjoy a productivity heyday and send less productive human workers packing? Melissa looked for early signs of worker displacements by AI, and her findings are encouraging: No labor-market shock looks imminent. … Also: William assesses the geopolitical stakes of a prolonged US/Iran war. The risks include provoking China and sinking Trump’s “grand bargain” trade deal. Needed is a diplomatic off-ramp. … And: With Q2 results in hand for 90% of the S&P 500 companies, Joe shares highlights from aggregate earnings data. Notably, 10 of the 11 S&P 500 sectors grew earnings y/y last quarter, and “Main Street” bested the Mag-6 in earnings beats.
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LOWE'S: FORWARD PROFIT MARGIN
MORGAN STANLEY: PRICE, FORWARD EARNINGS & VALUATION
S&P 500 HEALTH CARE SECTOR & INDUSTRIES: ANNUAL EARNING GROWTH FORECAST
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