Weekly Recap:

by Eric Criscuolo & Michael Reinking, CFA

Last week the calendar flipped to a new month as the S&P 500 ended July essentially flat, despite significant turbulence under the surface. Stocks saw reason to celebrate the beginning of the new month. US equities posted solid gains which pushed the major indexes to their latest record highs. The collapse of tech hedge fund Situational Awareness at the end of July seemed to provide a clearing event for markets, and Tech rallied at the start of August. More importantly, it provided the MAC Desk a huge pile of opportunities to make ridiculous references to Mike “The Situation” Sorrentino and Treasury Secretary Bessent as a warlock in an apothecary- see our notes the last two weeks if you have no idea what we are talking about.

The second half of last week saw the S&P begin to consolidate the sharp moves from earlier in the week. In retrospect it was a sign, because this week has felt a lot different. The Dog Days of Summer fell upon Wall Street, and the consolidation trend continued.

From last Wednesday to this Wednesday, the S&P 500 traded in about a 1% range, and just off its All-Time High. At the close Wednesday it was basically flat for the week, and the equal-weight only slightly higher. 

You know what was also higher? The valuation of the LA Lakers - and probably all professional sports franchises. Josh Kushner and Bog Iger are buying a controlling interest in the team at about a $12.5B valuation. Current Lakers owner Mark Walter just bought his stake in October at a $10B valuation. MSGS and BATRA (Atlanta Braves Holdings) were up ~5% this week.  

Sectors were basically split between gainers and losers at mid-week and most were +/- 1%.  Energy led due to oil prices rising again. There was some divergence in the Tech sector.  Mega-caps and hyperscalers were flat to lower but the neoclouds and bitcoin-miners-turned AI datacenters, or BTCMTAIDCs, were sharply higher. Earnings and demand commentary out of the group were bullish but also continued to highlight the never-ending spending. Memory/storage names were up sharply as well. The news that Nvidia is partnering with several giant Wall Street firms to establish a $500B “compute financing platform” was the key talking point that helped push the AI ecosystem higher, outside of the hyperscalers. It also powered it’s asset manager partners- APO, BLK, BX, BAM, GS and KKR- higher as well. As we said at the time, Black Leather Jackets and Patagonia Vests…Unite!

Reports that Silverlake was looking to take WDAY private helped software push higher. PE and broader M&A activity in the industry could become an interesting dynamic given the pressure on business models and valuations that AI has put on it. The CPI inflation report was the big piece of economic data this week, eclipsed only by Week 1 of pre-season football as the most anticipated event. And befitting the action, it was uneventful. Headline and core inflation were right in line with consensus. Yields fell modestly as markets took down expectations for a rate hike in September, along with oil pausing after a recent sharp move higher. The PPI followed on Thursday, and was slightly cooler than expected, with no big surprises here either. It felt like the CPI non-event turned the cool-ish PPI data into more of a catalyst than it would have been otherwise. Two tame inflation prints back-to-back pushed yields lower and the S&P to its best day of the week, along with breaking above 7800 for the first time and setting a new record high. 

Thursday’s gain kept the S&P in the Green for the week. On Friday we pulled back from those records modestly, ending the week at 7785. Notably yields backed up, particularly at the long-end, cutting of a long-tenor Treasury rally before it began. Breadth was relatively strong with 8/11 sectors higher and the equal-weight up over 1%, outperforming by ~80bp. 

Energy was the clear leader, up ~7% on the back of oil’s gain. Utilities followed with IPPs leading. Financials (alt assets / banks led, insurance lower), Healthcare (Med Devices +ve) and Staples (Food, Beverage +ve, retailers mixed) sectors were up ~1% each.

Discretionary led to the downside (AMZN -4%, luxury/retail -ve). Comm Services (GOOG -3%) and Materials (miners, chemicals lower) were also weaker. 

Market volatility has been significantly depressed, especially in equities. The VIX as fallen to its low on the year, just above 14. That’s allowed systematic and vol-targeting investors to add exposure. While low volatility can remain in place for long stretches, it can also jump suddenly, which could lead to those funds taking their exposure down. 

The High dispersion / Low correlation market regime has begun to shift, with dispersion declining in particular and correlations inching up. The monthly VIX expiration is next Wednesday, August 19 and opex is on Friday August 21, resetting positions ahead of the Fed's Jackson Hole meeting at the end of August and the Fed meeting September 16.

On the heels of last Friday’s disappointing employment report the focus shifted to inflation data this week. The data was largely in line with expectations remaining elevated but not suggesting an acceleration. Headline and Core CPI were both on the screws up 0.1% / 0.2% m/m respectively. On an annual basis the reading were 3.4% and 2.5% both down a tenth from last month. Energy prices continued to decline though this could reverse in August. Within core the components that fell in June saw some modest bounce back (apparel/used cars/transportation services). Shelter was muted again at 0.1%.

Headline PPI was flat month-over-month, below consensus of 0.2% and up from last month’s -0.1% reading (revised up from -0.3%). Core was up 0.2%, a tick below the 0.3% consensus and down from 0.4% last month (revised from 0.2%). Final Demand Goods ex-Food & Energy rose 0.1%, down from 0.2% last month.  Final Demand Services rose 0.2%, down from 0.5%. The volatile Trade services (retail margins) fell 0.1%. The prior 3 readings saw it ping-pong: 1.5%, -3.1%, and 1.4% last month. Transportation and Warehousing pricing continued to ease after a run of strong increases in the first 5 months of the year.  Excluding Trade, Transportation and Warehousing, Services rose 0.6%. One other note portfolio management fees were up 6.5%, which feeds into PCE later this month. However, the methodology changes in September within PCE will likely lead to lower readings going forward.  

The labor market data was mixed. ADP weekly employment dropped to 8.25K/week, down from 15.0K in the prior report and the sixth straight decline overall. Initial claims moved up to 209k, but continuing claims remained under 1.8ml for the fifth consecutive week.  Within the NFIB Small Business index owners expecting to hire- a net 20% of owners plan to create new jobs over the next 3 months, up from 11% last month

This morning’s retail sales unexpectedly fell 0.6%, the largest drop since Feb. 2023. Ex-autos and the control group, which feeds into GDP, both fell as well, down 0.3% and 0.4%, respectively. Two caveats within the data - gas stations fell 0.9% as oil prices declined and non-store retailers (internet sales) fell 2.2%, which is some give back after Prime Day. Sales at restaurants and bars were up 0.5% maybe some World Cup tailwind. However, that could be a headwind moving forward as well as the easing impacts of tax refunds. Earlier this week Bank of America Institute noted that consumer spending growth moderated to 5% y/y from 6.3% in June

Today’s U of Mich Sentiment fell to 51 from 55.2 last month with steep declines in business conditions. Inflation expectations held reasonably steady, ticking up 0.1% for the 1yr time frame to 4.3% but holding steady at 3.3% over the 5yr time horizon.  The cumulative impact of inflation over the last couple of years is weighing on consumer sentiment only 8% of consumers expect income to outpace inflation over the next year. 

 The NY Fed released its Quarter Report on Household Debt and Credit which showed a slight decrease in household debt (-0.1%) to $18.8T driven by a decline in mortgage balances while most other categories increased. There was also a slight improvement in delinquencies with 4.7% of outstanding debt in some state of delinquency, down 0.1% from the previous quarter. Credit card and auto delinquencies >90 days remain elevated. 

This week there has been a steepening of the yield curve as the mix of last week’s jobs report, inflation data and disappointing retail sales report ease expectations for the Fed to hike rates. However, the long end moved modestly higher with investors not showing much interest in owning duration amidst the well-known fiscal imbalances and uncertainty around monetary policy. (See 2-10 spread below). This week’s 30yr auction tailed by 4bps. It is worth noting that this is not just a US issue but a global phenomenon. The odds of a rate hike in September have fallen to about 1 in 3 chances from about a coin flip a over the last month. The probability of at least 1 hike this year is now ~68% down from nearly 80% over the same time frame.  

Commodities and Crypto - geopolitical tension pushes energy & agriculture higher. Metals consolidate. Crypto lower

Global Equities -  Tech heavy indices in Asia closed higher. Europe was mixed, Latin America under pressure 

Europe - major indices ended the week on either side of unchanged consolidating around ATH highs.

Latin America - Brazilian banks were off >5% pretty much across the board after earnings. Local utilities also sold off sharply after a negative regulatory ruling. JP Morgan downgraded the country amidst growing concerns ahead of October’s election.

The FOMC meeting minutes and Flash PMIs will be the key events on the economic calendar. Import/Export prices, Housing Starts and Home Sales and Industrial Production will also be released as well as several regional Fed surveys. Earnings flow is ratcheting down but we’ll still get some important housing and consumer updates from Home Depot, Lowes, Toll Brothers, TJX, Deere, Walmart and Alibaba, among others. Enjoy your weekend!

by MIchael Reinking, CFA

Like the month of July, last week was eventful and volatile, anything but your typical summer doldrums. After President Trump paused strikes over the weekend oil prices fell sharply. However, kinetic activity resumed during the week after Iran broke the piece. President Trump repeatedly threatened to “hit ‘em hard” as if it was the chorus of a new pop song. Outside of geopolitics investors had plenty to digest - we entered the peak of earnings season, there were key central bank rate decisions, currency intervention and the continued momentum/tech wreck. That "situation" hit a tipping  point on Thursday with the forced liquidation of levered positions at the supernova hedge fund Situational Awareness. Traders saw this as a clearing event which along with strong mega-cap tech earnings helped tech stocks snap back in the back half of the week. That rally left the S&P 500 essentially unchanged in the month of July, which as we’ve highlighted throughout the last few weeks did no justice to the volatility under the surface. 

The month of August started on a much more positive note. Coming out of the weekend it felt like Ground Hog’s Day as President Trump once again put a hold on strikes as he suggested that there had been some progress in negotiations behind the scenes which could potentially lead to a diplomatic resolution. Early in the week press reports and comments from other administration officials suggesting that a deal to re-open the Strait was close sent ICE Brent back below $80 and helped Treasury yields pullback after hitting new YTD highs last week.

This along with more strong earnings and some mispositioning particularly within tech helped to trigger a broad-based rally throughout the start of the week. This concoction of catalysts had some of the same ingredients that sparked the rally at the start of Q2.

On Tuesday the S&P 500 broke out of the loose trading range that has been in place since early May, between 7,200 - 7,600. After gapping up on on Wednesday the index was trading around 7,800, up nearly 500pts (~6.5%) from last week’s low. This triggered some profit taking and markets pulled back modestly  as oil prices started to bounce amidst a flare up in the Red Sea. Oil and yields continued to move higher yesterday as details of the Iran/Oman proposal were leaked to the press. The proposal blocks the travel of US/Israeli ships and includes a fee, which has been a red line for the administration. 

Equity markets bounced back today despite a weak jobs report (details below) as investors began to reprice expectations for rate hikes later this year. For the week there were broad based gains across major US indices which were all up >2%. There were clear signs of risk on sentiment. Tech did much of the heavy lifting while energy and other defensive sectors underperformed.

This was another very busy week of earnings with numbers continuing to be very strong. According to FactSet Earnings Insight. Over 85% of companies have beaten EPS estimates with Q2 earnings up  ~50% y/y. This does include about $150B in the markup of investment portfolios at Amazon and Google. If you exclude that earnings are still up ~30%. Revenues are also very strong up 15% y/y. Both are at the highest levels since 2021 - the Covid re-opening.

This week's economic data was mixed. The focal point was the labor market data which disappointed. ISM manufacturing accelerated from last month coming in ahead of estimates at 55.6, hitting the highest level since 2022. The underlying metrics were also positive pretty much across the board with new orders, production and backlog all increasing. The Employment index improved to 52.8 from 49.7, its highest level since August of 2022. The prices component remained elevated but did moderate from last month. 

However,  ISM Services came in below estimates, holding steady from last month. The underlying metrics were mixed with both new orders and business activity improving though backlogs fell. The employment component fell back below 50, the demarcation line of growth, after moving above that threshold in June for the first time since February. Pricing pressures remained evident moving back above 70. 

Coming into today's BLS Employment report the labor market data was mixed. JOLTS was about inline with expectations at ~1.4ml. Claims held steady with suppressed levels. However, the ADP Jobs Survey was disappointing.

It is hard to put a positive spin on today's jobs report. Nonfarm payrolls fell 23k along with negative revisions of 103k to the previous two months. There were big declines in government (-53k) and leisure & hospitality (-40k) which some are discounting given the potential seasonal impact on gov’t and unwind of World Cup in the latter. Total private hiring was up 30k, in line with the revised reading from last month. Construction was the positive standout (+22k).  The unemployment rate actually ticked down to 4.1% with a decline in the labor force while participation rate was also down 0.1% from last month to 61.4% which has been steadily declining throughout the year. Wages came in below expectation up 0.1%/3.2% m.m/y.y (vs. 0.3%/3.5% cons) which flew in the face of the ADP data (4.4% for stayers/7%) for changers). The average workweek was unchanged at 34.3.   

This data does take some of the pressure off the Fed to hike rates but also sets up for potentially the worst case scenario where the labor market weakness but prices remain elevated. 2yr yields intially moved down ~10bps but ultimately gave up about half of that move. For the week Treasury yields were down 7-9bps across the curve.

One other note this week the Department of Treasury released its Quarterly Refunding Statement. Issuance was held steady at $125B with no change to the make-up of that issuance saying,  “Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.” However, there was one minor tweak to the language in the statement where the word "increase" is replaced by "changes" in regard to future nominal coupon and FRN auction sizes, which is a subtle signaling to control the long end.

The MOVE index also compressed this week (supportive of a risk on environment).

Moving to currencies…..The big story was the Yen with officials in both the US and Japan confirming the first coordinated currency intervention since 2011 last week and suggesting further action could be taken. This was carried out with the NY Fed reportedly selling Euros. Treasury Secretary Bessent supported the use of the FIMA Repo Facility, which allows central banks to use Treasury holdings as collateral to access dollars, as opposed to selling bonds in the open market. The mechanics of both actions are meant to have as little impact on interest rates as possible. This morning right after the jobs report Japan Finance Minister said lines of communication with the Treasury are open and “both sides won’t hesitate to intervene” which put a bid back in the Yen which had started to drift lower again over the last couple of day.  

Commodities and Crypto - Energy lower metals rally

Global Equities -  Europe outperformed, Asia was mixed, Latam moved lower  

Europe - There was broad based strength across the region with most indices closing at new highs. Like the US it was a busy week of earnings. PMIs were revised up slightly and Germany factory orders were strong. However, Eurozone retail sales missed estimates.

China/Hong Kong - Mainland China indices closed higher with strength in the tech trade. However, the Hong Kong Hang Seng ended the week modestly lower. Alibaba (+>5%) was a positive standout after it released is most recent Qwen model to positive reviews. According to Bloomberg China’s Moonshot was the most recent AI model gone wild, breaking out of its test environment. 

Trade tensions between the US and China were very much in the headlines this week ahead of President Xi's expected visit in September. This week there were reports that the US administration is considering import bans of China data center components including optical transceivers which comes after last week's robotics ban. President Trump also ordered new 15% tariffs and price floors on imported polysilicon used in chips and solar panels. In response China will place restrictions on drone components and related technologies which will require a case-by-case review. It is initiating a security review of imports of printing, copying, and office equipment. It also sanctioned Compliance Testing for its role in the recent FCC decision and announced sanctions against six additional companies. It is also launching a probe into Palo Alto.

Economic data continues disappoint with PMIs coming in below expectations. Trade data showed a bigger than expected trade surplus with exports increasing nearly 24% y/y ahead of the estimate of 22.2%. Imports were a touch light with crude imports rebounding 22% from June.  

South Korea - ended the week down ~5% with memory stocks stocks down >10% this week amidst the US earnings that failed to meet high expectations and growing concerns of increased competition from  CXMT after reports that multiple PC OEMs are using their memory and that the company is considering building another DRAM facility.

Japan - The Nikkei ended the week modestly higher. Tech and consumer stocks were mostly higher while financials were mixed. The big story was in currency markets as discussed above.

Over the weekend Berkshire earnings will get some attention. As we look ahead to next week the pace of earnings starts to slowdown a bit and will take a back seat to economic data. The inflation data on Wednesday and Thursday will be the focal point followed by retail sales on Friday, which will be a good lead in to the late cycle retail and tech earnings the following week. 13f's are also due out on Friday. Have a great weekend!

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