Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Last week it finally felt like the Dog Days of Summer. Most major US equity indices ended the week modestly higher, consolidating the recent gains. The S&P 500 briefly broke above 7,800 but spent the week trading in a pretty tight range ahead of this week’s monthly options expiration. The combination of the week’s inflation data, which was largely in line with expectations and Friday’s disappointing retail sales caused rate hike expectations to ease. The 2yr ended the week down a couple of basis points but yields at the long end moved higher. This has been a global phenomenon as investors struggle with increasing supply and shun duration. ICE Brent Crude traded back up to the high 80’s as an Iran deal remained elusive with the administration saying it would pivot to economic pressure. The biggest story from a corporate perspective was the unification of the Black Leather Jackets and Patagonia Vests with Nvidia’s Jensen Huang announcing a partnership with several giant Wall Street firms to establish a $500B “compute financing platform” helping the AI ecosystem ex the hyperscalers trade higher.

There continues to be continuity in those themes and the central character of recent MAC Desk notes, Treasury Secretary Bessent, aka. the Warlock of Washington, a name earned for his well-timed and crafted announcements to influence markets and suppress volatility. We’ve included our original “Concoction of Rally” rendition just in case you missed it a couple of weeks ago….notice the foreshadowing in the ingredients. 

On Wednesday he added a new ingredient to his concoction brew, which was the big story of the week. The Treasury Department announced it would double the size of its liquidity support buyback operations for longer-dated Treasuries to at least $4B. The announcement came as 10/30yr yields were hitting new YTD highs. Bessent gave a wide-ranging interview on CNBC yesterday which is worth a watch as it gives some insight into the thought process of the administration. At this point it is more symbolic than anything else, as the size of the buyback is very small relative to a multi-trillion dollar market, though he did suggest it could be larger than $4B. This resembles the shifting of duration in issuance by Treasury Secretary Yellen, whom he criticized at the time. It also has shades of Operation Twist used by the Federal Reserve after the GFC. This could signal a more coordinated effort by the Treasury and the Federal Reserve, something acknowledged by Mr. Bessent and that Fed Chair Warsh has suggested in the past (this is sparking some discussion of Fed Independence again). During his interview Mr. Bessent also addressed one of the big concerns in Treasury markets- the increasing fiscal deficit, with the national debt crossing $40T. He suggested we may have seen the peak of deficits driven by tariff refunds, and that there would be a fiscal announcement next week while also pointing to the "run it hot" strategy, aka grow our way out of the issue. It is clear the administration is very focused on the rate environment which by the way is also central to the AI Arms Race. This addd some intrigue to Fed Chair Warsh’s speech at Jackson Hole next week. He has said the bond market should be a signal for the Federal Reserve and now the Warlock has his thumb on the scale. One of the interpretations of this move, which is debatable, is that it is adding liquidity to the system which would have inflationary implications, potentially making the Fed’s role harder. 

From a Treasury market perspective, the initial response sent long dated-Treasury yields down 7-10bps, reversing some of the recent steepening of the curve but a good portion of that has unwound. The equity market response was relatively muted, but it did have significant implications across hard assets and the crypto complex as the action reignited the debasement trade with the USD weakening. Precious metals reversed losses from early in the week with gold up >5% moving back above 4,500 and its 200d ma for the first time since June. 

The above narratives also played into the hands of the crypto complex. This also coincided with crypto executives meeting at the White House to push forward the Clarity Act while regulators continued to take steps for their own regulatory framework should that not advance through Congress. Crypto has been deep in the throes of a bear market since the end of last year. Since June the range and volatility in both Bitcoin and Ethereum had compressed significantly. There is an old saying on Wall Street,  “Never short a dull market” - crypto trading degens should have taken heed as this triggered the biggest liquidation event since the October 10th selloff, but in the opposite direction, with over $3B of short positions reportedly closed out this week. Bitcoin is up >20% for the week trading back over 75k and breaking above its 200d ma for the first time since Q4 of last year. Ethereum is up nearly 30% for the week as it has additional tailwinds from stable coins and tokenization. 

This week oil prices continued to move higher with ICE Brent trading in the low 90’s as the 60-day ceasefire ended and Iran officials suggested a shift in posture from defensive to “fully offensive”. President Trump said actions taken by the administration will be an Economic D-Day proclaiming any country doing business with Iran will face Tremendous Economic Consequences. Secretary Bessent said he will give details at a press conference on Monday while also saying it was unlikely that there would be a large-scale restart of kinetic activity. Earlier this week the UAE said it was cutting off ties with the country. The obvious question is whether this will impact China’s behavior and how aggressive the administration would be ahead of President Xi’s visit in September. 

Equity markets had drifted lower throughout the week before bouncing today. The S&P 500 ended the week down ~1.5% breaking below 7,700 and the low-end of the recent range that had been in place since the upside surge in the opening days of August, but there was really no technical damage done as the index held above its 20d ma . The intraday ranges at the index level were pretty tight, likely due in part to options expiration. We’ll see if the rolling off of those positions is a release valve for some volatility next week. The tech and momentum trade has been volatile again with aggressive rotational activity occurring beneath the surface, similar to what we saw during July with the equal weight outperforming by ~1% this week. Small and midcap indices underperformed ending the week down ~2%. 

Within the S&P 500 there were only three sectors ending the week higher. Energy and Materials were both up a little more than 2% given the commodity strength. Healthcare was the other standout rallying over 4% after the landmark positive phase 3 cancer trial results from Merck and Moderna which sent both stocks sharply higher. This created a burst of optimism across pharma and biotech which along with the rotational activity bled throughout the sector. Healthcare has surpassed the S&P 500 returns YTD after trailing by ~15% not too long ago, a similar comeback to the Knicks in Game 4 of the finals. 

Retail earnings have been the other focal point within equity markets after last Friday’s disappointing retail sales numbers and the results have been mixed. Management teams have suggested that the consumer remains resilient, but customers are feeling the pressure of high fuel prices. This is impacting spending patterns with consumers making tradeoffs and looking for value. A couple of companies have acknowledged that fuel prices are also impacting their freight costs. Tariff refunds have boosted earnings across the sector with some the bigger retailers suggesting that has helped offset some earlier price reductions. There is a cautious tone in general with some concern that spending levels will pull back in the back half of the year as tax refund tailwinds fade. Target and Estee Lauder were two of the positive standouts. Walmart fell ~10% for the week hitting new YTD lows.

The three sectors with the highest concentration of AI exposure all ended the week down >3% (Info Tech, Industrials, Utilities). Ahead of Nvidia earnings next week semis were down >5% with more signs of increasing competition for the company. Marvell announced a commercial agreement with Google to develop custom silicon for their TPU ecosystem. The company also issued warrants to Google to purchase ~$12B of their stock. This announcement weighed on Broadcom earlier in the week, who was also in the news with reports it is in talks with Blackstone and Apollo Global to put together a AI chip financing package of up to $100B. There were quite a few headlines related to the highly anticipated Open AI and Anthropic IPOs throughout the week. The two South Korean memory companies announced giant buyback programs to help dampen some of the recent volatility. Data center and energy infrastructure-exposed companies were some of the worst performing within Industrials. Defense stocks also got hit on the “de-escalation” in Iran. Airlines were also under pressure with rising oil prices though rail/freight companies outperformed. IPP’s were some of the worst performing within Utilities though there was broad-based weakness.

Financials ended the week down a little more than 1%. Crypto-exposed stocks were the best performing (ROOD/COIN) while exchanges, payments processors and data analytics companies also ended with gains. Regional banks were under pressure while alternative asset managers gave back some of last week’s gains.  

The flash Manufacturing PMI of 53.2 was lower than consensus and last month (53.9 each) but still above the growth/contraction boundary of 50. Part of the manufacturing drop was due to reduced inventory build and supply delays. Services was very solid, at 56.8 and well ahead of both consensus and last month (54.0 and 54.6, respectively). Average input costs across goods and services rose at the slowest pace since February.

The latest monthly Fed regional manufacturing surveys were more positive for manufacturing. NY Fed's Empire Manufacturing survey saw Current Conditions jump to 20.6, its highest level since 2022. New orders continued to increase but the improvement was less than last month. Prices were mixed with Prices Paid growth increasing, but Prices Received increases moderated. Forward-looking Business Conditions and Order expectations both improved. The Philly Fed’s main index rose to its highest reading in over 5 years and the Expectations index jumped to its highest level since 1983. The New Orders index moderated but the outlook rose. Prices Paid and Received saw a similar results. 

Housing continues to be challenged, highlighted not only by housing and retailer earnings this week but also in the data. Housing starts were lower than expected and fell from last month to a near 5-year low. However, Building Permits rose after 2 straight months of declines. Pending home sales fell 2% versus both last month and last year.

Import prices declined for a second straight month driven by fuel imports (-7%), though they are still up 5.9% y/y. Ex-fuel, import prices rose 0.4% m/m. Computer/electronic product manufacturing import prices rose 1.2% m/m (9.4% y.y). Industrial production was about in line with estimates. Weekly jobless claims continued along their low trajectory. 

Fed Speak: The FOMC minutes offered a little for both Hawks and Doves. It noted "most participants anticipating that inflation would step down", but “many participants assessed that policy tightening would likely be necessary if inflation did not decline.” The minutes also noted that chair Warsh floated the idea of reducing the number of policy meetings from eight to six, an idea the MAC Desk fully supports as we deplete our Fed memes stockpile. In an interview, SF Fed President Daly said she sees no signs of weakness in the labor market nor worrying signs of inflation, and the Fed will stick to its job regardless of Treasury action. St. Louis Fed President Alberto Musalem (non-voter) said he supported a rate hike, with monetary policy neutral-to-accommodative. When he talks with his district contacts, inflation is the number one concern and is having a real-life impact. He discussed a competition for capital from government financing and the AI buildout, plus strong US growth as main drivers of higher yields through the term premium. He also noted Fed policy is made independently of debt management and fiscal policy. 

Treasury yields were a big topic this week. They’ve actually been a focus for a while as the long-end has been on a steady march higher since July, eventually culminating in the 30y reaching over 5.30%. The treasury’s buyback increase was meant to blunt that upside pressure, and it worked for  a day. Bessent’s follow-up commentary hinted at more actions to come, including joint actions with the Office of Management & Budget (OMB) on “fiscal consolidation”. 

30-year yields reversed almost all of there buyback news decline and are hovering just below 5.30%. The 10y is trading higher than it was before the news and 2 year yields- the part of the curve that has been declining- rose as well. 

Next week’s Jackson Hole meeting has taken on greater importance for markets with this week’s Treasury, and treasuries, moves. September hike odds stand at 40%, versus 33% a week ago and 55% a month ago.

The Dollar fell against most major currencies this week. The general “debasement” narrative as well as uncertainty around more FX market (and bond) interventions have moved toward the front of investors minds. The Dollar notably fell 1.5% against the ultra safe haven Swiss franc. 

While rising crude is of course an issue, the Diesel market is becoming more and more of a concern. Crack spreads- the difference between a barrel of crude and the diesel refined from it- have reached record levels at over $100. US natural gas is range bound between $2.70-$2.80 but European gas jumped 7% this week. The agriculture complex also saw gains this week. The US is dealing with drought conditions and the threat of El Nino as a major problem is growing.  

Metals saw broad gains, and in particular gold and silver. Gold gained ~5% this week and is up about 15% this month. The falling Dollar was a driver, and this week’s market interventionist commentary by Bessent flamed the debasement narrative. Gold and silver rallied despite long-term yields erasing all of the one day reversal in yields. Copper was relatively flat, bouncing off the 50d ma but hanging around record highs. While US industrial data is relatively strong, Chinese data continues to disappoint.

Crypto had a huge move this week. Bitcoin and Ether rose over 20%. A vicious short-squeeze was a big part of it. Bitcoin started to rally on Monday ahead of a crypto industry meeting at the White House. President Trump then strongly voiced his support for the CLARITY Act as well as bringing perp-futures giant Hyperliquid to US markets. That triggered more upside, driving more short liquidations. The Treasury buyback announcement and Bessent commentary then poured gasoline on all of it. According to Coinglass, more than $1 billion in Bitcoin shorts were wiped out in a single hour.  The question of whether the asset is entering a durable inflection or investors fade it as a short term mechanic squeeze should be answered relatively soon. Bitcoin is approaching its 6-month high ~$82K.

Europe was mostly lower this week though Friday saw a modest rally. The STOXX 600 fell for the second straight week after advancing each of the prior three weeks. The UK’s overweighting in commodity and healthcare equities helped the FTSE 100 outperform as it ended up with a slight gain for the week. Germany’s DAX fell 4 straight days before ending the streak on Friday. France’s CAC’s losing streak was at eight straight before Friday’s gain. In the macro world, flash PMI’s were stronger than expected across the region, manufacturing in particular. Sweden held its policy rate unchanged, as expected.                   

Asian markets were mostly lower as well. Japan and Hong Kong were the clear standouts on the downside and upside, respectively. Expectations for a September rate hike in Japan have been steadily climbing (80% market-priced chance, 2y yield up 17bp this month) and saw further support after Bessent’s “asymmetric information” comments. The hike expectations run counter to the weaker than expected 2Q GDP print (1.1% vs 2.0% expected). Softbank fell almost 8%, industrial / manufacturers were pressured and banks were broadly lower. The Nikkei failed to hold its 50d ma.

Chinese economic data disappointed and continued to show a challenged domestic market. Industrial Production, Retail Sales, Fixed Asset Investment and Foreign Direct Investment all fell and missed expectations. Vice Finance Minister Liao Min said Beijing would step up fiscal support.

Hong Kong saw broad gains however and the Hang Seng regained its 200d ma. Tencent, Alibaba, BYD Xiaomi and SMIC helped Tech offset more sharp declines from Z.AI along with Lenovo, MiniMax and Baidu. Shanghai fell this week but Unitree Robotics rose 460% on its IPO. South Korea was down 1%. Samsung and SK Hynix rose but most of the market was lower. Industrials and manufacturers were particularly weak. Emerging markets saw pockets of strength, helped by commodity prices and dollar weakness. 

Turning to next week the key economic data is Personal Income and spending and PCE on Wednesday, which could come in a little hot given some of the inputs from last week’s PPI.  Late cycle retail and tech earnings will also be in focus. Wednesday after the close will be the main event with earnings from Salesforce, HP, CrowdStrike and the big kahuna Nvidia. On Friday Fed Chair Warsh will give his first speech at the Jackson Hole Economic Symposium. And most importantly we get the kickoff to the NCAA Football season. Can't wait to see Penn St.'s next White Out game. Enjoy your weekend.

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