Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Treasury Secretary Bessent was the main character in the market's story last week. The Treasury Department increased its bond buyback program, and though the program is a very small drop in a very big ocean, it was the messaging, and Bessent’s wide-ranging, follow-up interview, that was really the focus. It was yet another example of direct market intervention by the Treasury, following the recent yen intervention. It also rekindled concerns about Fed independence and reminded us of Operation Twist, which allowed us to use our latest ridiculous memes.

Long-term yields moved lower initially but quickly erased the move. The S&P 500 fell 1.5% with a monthly options expiration likely impacting the action. AI exposure was under pressure as the sectors with a large concentration in it: Tech, Industrials and Utilities- performed the worst. Oil’s strength contributed to the equity weakness and inability of yields to move lower. Crypto, however, was even stronger. Bitcoin and Ether rose over 20%, with a vicious short squeeze contributing to a lot of the upside.

This week we continued to march towards the end of summer. US equities spent the first half of the week uninspired, quiet and range bound. 

There was some sadness to work through with the passing of American icon Dolly Parton, but we were basically biding time before this week’s Three Amigos: PCE, Nvidia earnings and Warsh’s Jackson Hole speech. 

Before that triumvirate, Technology and AI-related momentum continued to come under pressure to begin the week. However defensive sectors and financials helped offset those declines. Geopolitics turned more constructive for equities after Pakistan reported significant progress in talks with Iran, along with reports of a potential Iran-Oman arrangement for safe passage through the Strait of Hormuz. Oil began to move notably lower, pulling yields down with it. Tech bounced but Retail came under pressure after Dick’s Sporting Goods sold off sharply on its earnings results. The company noted that "as the quarter progressed, conditions across portions of the athletic footwear and apparel marketplace became increasingly promotional..." and guidance was lowered. ULTA, BBY, BURL URBN and DLTR were also among the retailers that were lower after earnings. Consumer credit provider AFRM rose after earnings on Friday, however, with no signs of deteriorating credit within the business.

The first of the highly anticipated macro updates was PCE. Core matched expectations while headline was a bit higher than expected. It was a rather uneventful print and the S&P ended the day flat, but at 3.3% year over year, core PCE remains well above the Fed’s 2% target.

That led into Nvidia’s earnings. It was once again a stellar print. Their C-suite has cornered the market on bullish commentary and now has to make up new synonyms for “extraordinary”. Significant attention was paid to the company’s newly issued guidance of 70% revenue growth for fiscal year 2028. That’s on top of the roughly 90% growth the Street is modeling this year. Consensus was only at about 45% for FY28 into the print. Also, the company only just reported fiscal 2Q 2027, so a 2028 guide is very early. The stock rose 10% on the results but the Halo effect on AI hardware/enablers was not as impressive. The ICE Semiconductor Index gained only 2% the day the stock rose 9%. The DRAM ETF was up less than 1%.

The biggest tech winners were on the software side. At the tip of the spear was Salesforce, a company that, like software overall, has had to deal with a lot of concerns around AI disruption. It rose over 20% on its earnings, and it looks like the group overall has slain the SAAS-pocolypse Night King. The IGV software ETF was up 6% this week, 15% in August and has clawed back into the green for the year. Cybersecurity stocks also had strong gains this week, led by CRWD keeping pace with CRM’s 20% gain, though it wasn’t alone as several cyber names saw gains of around 10% on Thursday before giving up some of that on Friday. 

Beneath the excitement of the AI growth numbers there are still concerns. The astronomical spending, and how to fund it, remains a key one, as does the overall question of return on all the investment. Nvidia has also cemented itself as the key provider of credit to its customers, which has some historically terrible precedents. The ever-rising cost of memory and ability to build data center infrastructure is also an issue with no clear near-term solution.

Heading into Friday and Warsh’s speech the S&P 500 was up a little under 1% for the week, with Tech the clear leader followed by Utilities and Financials as the only other sectors higher. The fall in oil made Energy the lagging sector. Healthcare and Consumer Discretionary were also lower. Negative earnings reactions from retailers (noted above) weighed on Discretionary. Healthcare gave back some of last week’s gains and a cyberattack on Boston Scientific didn’t help.

The S&P was around flat as Warsh began to speak at 10am. By the end of his comments the S&P had risen to the HOD ~7770, almost but not quite regaining last week’s high. The treasury curve flattened as the 2-year rose sharply and 30y fell. It was a hawkish speech but not seismic (more details below). Despite the formulaic “rate hikes = bad for stocks” , the greater clarity on the inflation focus, lack of concern for the economy, and optimism around AI provided a clearer path for equities. The S&P stalled out after hitting 7770, however and began to retreat. Tech in particular faded. NVDA traded as high as $229.25 but fell 5% to $217, filling half the earnings gap-up. 

The S&P 500 finished the week up 0.5%. The equal-weight was a mirror image, falling 0.5% as megacaps held up while breadth deteriorated. Small caps lagged with Friday's backup in yields not helping.

Tech led for the week despite Friday's stumble, with software doing most of the work and Mega Caps holding up overall (NYSE 100 +1% for the week). Comm Services was another leader. META was higher and Meta announced an $18 Billion settlement on its social medial addiction trial, which could also have ramifications for Alphabet. Cable/media were higher as well. Financials rounded out the top as exchanges (ex-crypto) and insurance performed well. Utilities was among the leaders before selling off on Friday as rates rose. Energy lagged with oil lower. Healthcare’s weakness heading into Friday continued as recent gains were pared. Discretionary saw a bounce from retail and AMZN rose over 3% on Friday. Industrials saw AI-exposed names weaker (HVAC, electrical equipment, etc).  

Trade and tariffs returned to the spotlight this week. Talks between the US and Canada broke down and led to back and forth tariff announcements by both countries (the Loonie Toons). It looks like we’re also renaming Lake Ontario as Lake America. Speaking of, President Trump signed an executive order that would ban the import and usage of large utility grid equipment like transformers from certain countries. There’s now a 120 day clock for the Department of Energy to develop rules and regulations for this order.

We’re about to turn the page on August and head into September, historically the worst month for equities. Not only that but the VIX has dropped back below 15, a very subdued level. It can remain low for a long time but we’re in hurricane season now. Global geopolitical storms continue to swirl. A deteriorating situation between Russia and Ukraine could re-animate a dormant shock to commodity markets that could flow into equities. We’ve already seen agriculture commodities react by rising substantially. Those global tempests could be met by developing national (mid-terms) storms and a lot of debris could start flying through the air.  

Before we discuss Chair Warsh’s speech in a little more detail let’s take a look at this week’s economic data.

The highlight this week was PCE, spoiler alert this is still the Fed’s preferred gauge of inflation. Core PCE (0.2% m.m, 3.3% y.y) was on the screws while the headline was a bit hotter than expectations (0.2% / 3.7% vs 0.1% / 3.6%). The increase was driven entirely by Services. Goods prices fell 0.1% versus June, led gas and other energy goods falling, which added on to last month’s 0.6% decline. Furniture and household items also fell.  Motor Vehicles/parts rose versus last month as did Other durable goods. Transportation services moderated from last month.  Services rose 0.3%, up from last month’s 0.1% rise. A big part of that was Financial Services and insurance, which moves with financial markets. This is one of the modifications that is expected at the end of September. Inflation has moderated after the March to May acceleration. Street economists suggest that the data modification could lead to a reduction in annual readings by 0.1% - 0.2%. However, even with those adjustments, the readings are still well above the Fed’s 2% target, which Chair Warsh said is not changing, so there is still a lot of work to do. 

Personal Spending rose 0.2% versus last month and was generally inline. However spending growth has declined since May, real spending was essentially flat and most of this month’s spending increase was from Financial Services and Healthcare, while spending on goods declined broadly. 

Durable Goods rose 1.1% from last month, beating estimates and increasing from the last report. Ex-defense and aircraft (i.e. capital goods orders) came in below estimates up only 0.2% versus 0.9% consensus. However, part of this miss was the fact that last month’s reading was revised up to 1.7% from from 0.9%.

The housing market remains stuck in the mud. Case Shiller and FHFA showed that home prices are up ~2% YoY. While both new and existing home sales remain tepid at best. 

Ahead of next week’s labor market data the BLS benchmark revisions for payrolls from 3/25 - 3/26 were down 79k or 0.1%, while estimates were looking for an increase of ~175k. This comes after back to back year’s of nearly 1ml negative revisions. There were no real shifts in the high frequency data with the ADP weekly ticking up a couple thousand and initial and continuing claims remaining subdued.

At least Chair Warsh has a sense of humor,  as his speech began with a discussion of hikes not of the monetary policy variety but out in nature, potentially causing some news scraping algos to tweak out (that is a technical term). He discussed past hikes with former Fed Vice Chair Kohn and Chair Bernanke describing the former as a “steely marathon death march” and the latter as “an easy stroll”. He suggested, “before setting out, do a wellness check and ask yourself: "Is this a Kohn day or a Bernanke day?"” There may be some double entendre about their central banker careers and the Fed’s current crossroads as it is seemingly moving towards practices of the former as opposed to the latter. Kohn was known as process and data-driven while Bernanke is remembered for his gradualism with a lot of forward guidance. It's also possible the MAC Desk spent too much time thinking about this part of the speech (probably the latter).

He broke the speech into four sections a discussion of AI, forward guidance, key principles he believes should guide monetary policy and his assessment of the economy. Starting with AI he walked through the growing impact of the technology and raised questions about how this will influence growth, labor markets and capital intensity going forward. This was done in some detail but largely said he would leave findings to the task force which is being led by Marc Andreessen, Charles Jones (Stanford Professor of Economics and part of the Anthropic Institute) and Asha Sharma (Microsoft).

Moving to forward guidance, he made the case that this practice served a purpose after the GFC, but it had overstayed its welcome and highlighted 2021 as a situation where it negatively impacted policy. He once again talked about the importance of market signals which he said should be “as unfiltered as possible” including Treasury trading and FX, two areas where the Treasury has intervened recently. He highlighted the “hall-of-mirrors problem. If markets rely materially on the Fed's guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments . . . more likely to be caught unprepared for a turn of events . . . and more likely to commit errors in policymaking”.

He then discussed 7 principles:

He then went on to highlight the strength and resilience of the economy despite multiple shocks. He highlighted strong capex, corporate profits, tight credit spreads, increasing consumer spending (as measured by private domestic final purchases (PDFP)) and a labor market that is in balance. He noted outside of housing, “I would be hard pressed to describe broad financial conditions as restrictive.”

His discussion around inflation noted the better-than-expected summer inflation readings but said that underlying trends had not improved meaningfully. However, he did provide some insight into what he is watching - (I added this not AI for the record) the breadth of underlying components in PCE and commodities. He noted that within PCE 54% of goods/services components were up >3% over the last year, well above the 32% in the two decades before the pandemic. This has improved to 49% over the last six months. He also highlighted that inflation expectations have remained well anchored but warned that can change. He capped his speech by putting the blame of 65 months of sustained elevated inflation squarely on the Fed and ended with, “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job . . . our mandate . . . and our charge to keep.”

All in all, relative to at least what I expected from the speech, which was not a lot, this exceeded expectations as it at least provided some insight as to how he’s thinking and what he’s looking at. Clearly there were some hawkish undertones causing markets to reset rate hike expectations, whether there is actually follow through to the that remains to be seen. The probability for a September hike moved back up from ~35% yesterday to nearly 60%. The probability of at least one hike by the end of the year currently sits ~90% from 75%, with a pretty significant shift for at least two hikes to ~50% from 29%.

There was a substantial flattening of the curve with the 2yr up >10bps. The USD index moved up ~0.5% reversing pretty much all of the post Treasury buyback weakness.

Japan - the Nikkei ended modestly higher with pretty broad based gains. There was some weakness in retail and memory maker Kioxia traded shaprly after reports of increased capacity in the country. Inflation data came in slightly hot. There was some hawkish BOJ commentary adding to speculation of a hike in September. Rates moved modestly higher throughout the week.

China/Hong Kong - ended mixed. The economic data continues to disappoint with speculation of further policy support. Officials pushed back sharply after Treasury Secretary Bessent’s threats related to Operation Economic Outcast. Ahead of President Xi’s visit the US also imposed a 7.5% tariff on Chinese goods over alleged excess manufacturing capacity.

South Korea - ended modestly lower due to weakness in the memory stocks. The Bank of Korea raised rates by 25bps, the second consecutive hike, taking the policy rate to 3%.

Europe - most major indices ended the week higher. Germany outperformed up 1.7% with strength in tech, financials and industrials. France’s CAC 40 underperformed ending down ~1%. Typically that weakness is related to the luxury stocks but that was not the case this week as they closed mostly higher. There was weakness in financials, energy industrials, utilities and communication.  There are growing concerns around fiscal deficits ahead of ahead of elections with far-left candidates starting to move up in the poles. 

Brazil - financials were very strong after inflation data came in better than expected with expectations for further rate cuts. 

Next week will bring August to an end. We’ve seen some interesting market moves at recent month-ends, like the Situational Awareness fund imploding in late July. We’ll see if that continues. Earnings will include updates from Dell, Snowflake, Medtronic, Broadcom and HPE. The monthly jobs report, ISM manufacturing survey and Biege Book will be the important macro data. The G20 will hold a finance and innovation meeting in North Carolina, which could provide some geopolitical news. It will also be the final week before Labor Day and the unofficial end of summer. If that sounds sad, Saturday is the strangely-named Week Zero for college football, officially kicking off the regular season. UNC takes on TCU over in Ireland to start things off. Hopefully that cheers you up. Happy Birthday Nolan!

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