Wentz Weekly Insights
“Navigating by the Stars Under Cloudy Skies” Powell Reiterates Data Dependent Fed

Nvidia and the Fed. That seemed to be all investors cared about last week – Nvidia, to gauge whether the AI frenzy would continue, and the Fed to gauge how much higher interest rates can go. By the end of the week stocks finished mixed with an outperformance in tech and growth stocks while Treasury yields moved higher on the short end and were unchanged on the longer-end (the 10-year Treasury yield went as high as 4.37%, hitting the highest level since 2007).
Earnings results from Nvidia crushed analysts’ estimates. It reported revenues that grew over 100% from a year ago, driven by its data center segment that saw a 171% jump in revenues. This segment is associated with the AI chips it makes for tasks like machine learnings and large language models, where a single unit sells as high as $40k. There has been a massive wave of investment in this area as no company wants to get left behind and the potential productivity and efficiency improvements it may provide. The company forecasted revenues of $16 billion for the current quarter, well above the average estimate of $12.4 billion. Obviously Nvidia is the largest beneficiary of the AI investment wave to date.
It appeared to be a buy the rumor sell the news event though as much of the current and future growth potential may be priced into the stock. Shares were up 9% the first three days of the week heading into the earnings, were up another 8% after its results were released, but ended up closing unchanged.
The bigger and more anticipated event was Federal Reserve Chairman Jerome Powell’s speech at the annual Economic Symposium at Jackson Hole. Powell gave a 15 minute speech that started with how inflation got so high, and factors causing it to move lower recently, and what is still keeping it too high. There has, and was again during the speech, a greater focus on the largest component of the inflation index – nonhousing services. This includes a range of services such as health care, food services, transportation, and accommodations. Powell said downward progress is needed here to restore price stability.
The second part of the speech focused on the outlook. Economic growth has been resilient with Powell acknowledging the “economy may not be cooling as expected.” Persistent better than expected growth could put “further progress on inflation at risk” and warrant additional rate hikes. He made similar comments on the labor market. If data shows continue strength as it has over the first half of the year, it would warrant more rate hikes as well.
The final part of the speech related to risk management and the path forward with policy. Despite some speculation the Fed may adjust its inflation target and move it above 2%, Powell reiterated 2% “is and will remain” the inflation target. There are several things that make its price stability goal more difficult – uncertainty about the lags in which higher interest rates effect the economy, the uncertainty on the effect of selling securities from its balance sheet, and the dislocations that are unique to this cycle due to one-time pandemic related events.
The ending message was what we expected the speech to be about; the Federal Reserve will be data dependent. If data comes in stronger than expected, it would warrant tighter policy, i.e. higher interest rates. If it comes in as expected the Fed could afford to pause rate hikes. As Powell concluded, the Fed is “navigating by the stars under cloudy skies.”
We may sound like a broken record talking about the Fed and its comments week after week, but we do so because it is one of the main topics markets care about. The expectation on what direction interest rates will go, or in this case how high rates will get, have a large impact on fixed income and equity markets, as well as on the consumer and economy. If interest rates are expected to go higher, bond markets will be quick to price this in and as a result, since consumer rates are highly correlated to Treasury rates, consumers will see higher rates on loans such as mortgages, auto loans, or even personal loans and credit cards. A rise in interest rates historically leads to lower loan demand, lower economic growth, rising unemployment, and eventually a recession.
On the other hand, if investors believe the economy will slow and fall into a recession, there is the expectation the Fed will soon cut rates and bond markets will begin pricing that in with lower longer-term rates.
Right now, the Federal Reserve is faced with the task of finding the level of interest rates that will be restrictive enough to slow demand and economic growth enough that brings inflation lower and to its annual 2% target without pushing the economy into a recession. The idea is bringing supply and demand in balance – right now inflation is too high because there has been too much money still chasing too little goods/services.
With its data dependent mindset, this week will be a big one for forecasting what the Fed will do next. We will see several reports on the labor market including the monthly employment report on Friday where the consensus estimate sees another 170,000 jobs added in August. Figures on the economy come with the second estimate of Q2 GDP and manufacturing surveys on Friday. In addition, we will see a reading on the Fed’s preferred inflation measure Thursday morning with the PCE price index. It may end up being a lose-lose for stocks. We would expect higher bond yields and lower stock prices with better than expected data but worse than expected data could be seen as an economy weakening more than expected and raise recession probabilities. As such, we see continued pressure on stocks.
Week in Review:
Stocks opened the week mixed on Monday. There was an outperformance in technology, particularly semiconductors, driven by a +8.5% day from Nvidia amid optimism over its upcoming quarterly report. China made several headlines after it, as expected, cut a short-term benchmark lending rate but unexpectedly left its medium-term rate unchanged. Treasury yields moved higher again with the NASDAQ gaining 1.56% and the Dow down 0.11%.
Tuesday saw another round of credit rating downgrades of several regional US banks, while retailer earnings received many of the headlines. Results from Lowe’s was solid, but Macy’s and Dick’s Sporting Goods were lower over weaker guidance amid a rising level of “shrink” – an industry term for theft and other unexplained loss of product not from sales, as well as increased caution on the consumer. Financials was the other sector lower after Charles Schwab announced it was raising debt to improve its capital position which raised concerns after the recent banking failures in the Spring. Data included existing home sales that disappointed to the downside over higher rates and very low inventory. Stocks ended lower, with tech outperforming again as the S&P 500 fell 0.28% while the NASDAQ rose 0.06%.
A rally in Treasuries after a 15 basis point decline in the yield on the 10- and 30-year bond helped move stock prices higher on Wednesday. Data showed the Department of Labor could see as much as a 300k downward revision to recent job gains, citing unemployment insurance tax records, while new home sales grew a little more than expected in July. It was more of a risk-on day with the NASDAQ outperforming with a 1.59% gain while the S&P 500 rose 1.10%.
An absolute blowout quarter and forecast by chipmaker Nvidia (which is at the forefront of the AI investment wave) drove the market higher again at the open on Thursday. However, investors became more cautious throughout the day as the Jackson Hole Economic Symposium kicked off with many Fed policymaker interviews. Stocks gave up early gain to end the day near the lows of the session. Rates moved higher while all US stock indices were down at least 1%, and semiconductors, which opened up about 2% higher, ended up being one of the worst performers by the end of the day down over 3%.
It was a calm start to the day Friday until the speech by Fed Chairman Jerome Powell at Jackson Hole mid-morning. He avoided making any policy decision for next month’s meeting, as expected, but other comments remained more hawkish. He reiterated the Fed needs to see more progress on inflation and suggested if the economy continues its strength it could put upward pressure on inflation and warrant even more rate hikes. Stocks went higher, then to the lows of the day in the afternoon, before reversing and ending near the highs of the day. The S&P 500 gained 0.67% while Treasury yields were relatively unchanged after seeing a brief spike after the Powell speech.
Stocks were mixed for the week but tech bounced back and outperformed value style investments. Treasuries were mixed across the curve with the yield on the 2-year Treasury note rising 14 basis points to 5.08% and the 10-year note dropping two bps, ending at 4.23%. Oil moved lower by 1.8% over continued economic growth concerns in China. The dollar index rose 0.7% while gold was up 1.2%. The major US indices finished the week as follows: NASDAQ +2.26%, S&P 500 0.82%, Russell 2000 -0.31%, and Dow -0.45%.

Recent Economic Data

  • Existing homes sold at an annualized sales pace of 4.070 million in July (seasonally adjusted) which was a 2.2% decline compared to June and is lower than what was expected (were expecting no change). The pace of sales in July were down 16.6% compared to July 2022. The highest sales pace this cycle was about 6.800 million all the way back in October 2020 (low was 4.000 million in January this year). Driving lower sales continues to be low inventories of existing homes and higher mortgage rates. Existing home sales are based on closings, so the number reflects contracts signed in June when rates rose roughly a quarter of a point. There were only 1.11 million homes for sale at the end of the month, up about 4% from June but down 15% from a year ago, reflecting 3.3 months supply versus a balanced market that is 6.0 months supply.
  • The sales pace of newly constructed homes in July was 714,000 on an annualized basis (seasonally adjusted) which was a 4.4% increase from June and 31.5% above the cycle low pace from July 2022. The Midwest and West saw an increase in the sales pace while the South saw a decline and Northeast was unchanged. The issue remains supply, which was relatively unchanged compared to June and down from a year ago and the other issue is homebuilders still cannot keep up with the demand, although it is starting to improve. The number of homes sold in the period that were still under construction rose 18% while the number sold where construction has not started fell slightly.
  • Durable goods orders fell 5.2% in July, where a decline was expected but at a lesser 4.0% rate coming after a strong 4.4% increase in June. The reason was transportation orders which are very volatile from month to month due to the high price tag on aircraft. The category declined 14.3%, more specifically nondefense aircraft orders which declined 44% and defense aircraft orders that declined 11%. Orders excluding these categories rose a solid 0.5%. The important figure to GDP, which is a direct input to GDP, is shipments of nondefense core capital goods which disappointed with a 1.1% decline.
  • The number of unemployment claims filed the week ended August 19 was 230,000, a decline of 10k from the week prior with the four-week average at 236,750. The number of continuing claims was 1.702 million, down 9k from the week prior with the four-week average up 6k to 1.697 million.
  • Data from the Federal Reserve showed the supply of money rose another 0.1% in July for the third consecutive gain which comes after nine consecutive monthly declines. A bounce in the money supply is not a positive sign for bringing inflation down, as this is a big reason inflation is running high after seeing a 40% increase in the money supply since the pandemic. However, the money supply is down 3.7% from the peak which happen exactly a year ago and is close to the largest annual decline in the money supply ever.
  • Consumer sentiment, an index compiled from a survey by the University of Michigan, fell to 69.5 for the final August survey, down from 71.6 in the previous survey which was the second highest reading since late 2021. The current conditions index fell to 75.7, down from 76.6, while the expectations index fell to 65.5 from 68.3. Consumer’s expectation on inflation over the next 12 months rose to 3.5% from 3.4% while the five-year ahead inflation expectation was at 3.0% for the third consecutive month.

Company News

  • Microsoft submitted a revised deal for its acquisition of Activision Blizzard and will not acquire the cloud streaming rights to all current and future game releases over the next 15 years. The rights will be divested to Ubisoft Entertainment. Getting the deal past UK regulators, the Competition and Markets Authority (CMA), was the last regulatory hurdle. The CMA said it has opened a Phase 1 probe into the new deal with a deadline for the decision on October 18. Microsoft has previously received approval of the deal by US regulators.
  • The Weather Company, which includes assets like The Weather Channel digit app and cloud based operations (but excludes the actual TV network) will be a standalone company after IBM announced it is selling its weather business to tech-focused private equity group Francisco Partners. IBM previously acquired The Weather Company in 2015 from The Weather Channel.
  • Netflix saw a bump higher in shares after research firm Antenna reported a study showed it continues to add subscribers in the U.S. amid a crackdown on password sharing and that it saw momentum in its ad demand. The study found Netflix saw 2.6 million subscriber adds in July with more of those subscribers going to the cheaper ad-supported tier.
  • Retailers have been under pressure this past week due to mixed earnings results and repeated commentary from management teams that they are cautious on the consumer heading into the second half of the year as discretionary spending slows. The other big headline with retailers this earnings season was “shrink’ – an industry term for the unexplained loss in inventory not sold, mostly from theft. Dick’s Sporting Goods blamed it lower forecast on shrink, and other retailers like Macy’s and Foot Locker talked about it as well.
  • The Wall Street Journal reported Rite Aid is planning on joining several other companies in filing for Chapter 11 bankruptcy protection in the coming weeks due to the high debt load and potential fines relating to its pending opioid related lawsuits. The article notes the company and government have not resolved how the company would cover lawsuit related fines, but is choosing to handle them as general unsecured claims for now
  • Hostess Brands is considering selling itself after receiving takeover interest, according to a report by Reuters. Several consumer brand companies like General Mills, Mondelez, and PepsiCo are companies that have shown interest.

Did You Know…?

More Oil:

The Department of Energy’s weekly petroleum report showed US production of crude oil was 12.80 million barrels per day (bbl/day), rising 100k bbl/day from the prior week for the highest post-pandemic level of production. The production rate is just 300k bbl/day below the record high for the US that was reached just before the pandemic in March 2020. For reference, global oil demand is roughly 101 million bbl/day as of the end of the second quarter. This is expected to increase to 102 million bbl/day by the end of 2023. On the other hand, Bloomberg reported global stockpiles of crude oil were about 3.37 billion barrels, a sharp decline of 60 million barrels from a month ago and at a six year seasonal low. The article notes the decrease in stockpiles is due to OPEC+ production cuts and an unexcepted bounce back in demand.

WFG News

The Election & Its Impact on the Markets

Wentz Financial Group is happy to announce we will be brining back guest speaker Phil Orlando for a discussion on his and Federated’s thoughts on the current market and economic environment. Phil will expand on the election of 2024 and its implications for markets. Phil Orlando is Chief Equity Market Strategist of Federated Investors with over 43 years of experience and is responsible for formulating Federated’s views on the economy, markets, and the firm’s investment positioning strategies. RSVP early as this event will reach capacity quickly!
Tuesday, October 3 @ 6:00 pm
Wednesday, October 4 @ 12:00 pm

Office Updates:

Please note with Labor Day on Monday September 4, stock and bond markets will be closed. Wentz Financial Group will be closed as a result.
We wish everyone a safe and Happy Labor Day!
We will be returning to normal office hours after Labor Day and will operate from 8:30 until 5:00 each day. As always, if you need to speak or meet outside of those hours, please reach out and we will be happy to set up an appointment.

The Week Ahead

There will likely be a larger focus on economic data this week due to Powell’s recent comments that the Fed will be data dependent and because of the amount of data releases from jobs and inflation to economic growth and manufacturing conditions. On the employment side, we will see the JOLTS (job openings and labor turnover survey) report on Tuesday where openings are expected to have remained flattish in July. On Wednesday we see the ADP employment report which has run hotter in recent months. Jobless claims are released Thursday morning and finally the DOL employment report comes on Friday where the consensus sees another 170,000 jobs added in August, slowing from recent months. The personal consumption and expenditure report comes out Thursday and will be closely watched for consumer spending, income, and inflation figures for July. The PCE price index (the Fed’s preferred measure of inflation) is expected to have increased 0.3% and the core index is expected to have accelerated to a 4.2% 12-month increase. Elsewhere, on Tuesday the Case Shiller home price index for June along with consumer confidence for August is released. On Wednesday we will see the second estimate on second quarter GDP based on more accurate data, along with the pending home sales index. Finally, on Friday, other reports include the PMI and ISM manufacturing indexes, construction spending, and motor vehicle sales for August. On the earnings side of things, it will be a light week again with mostly more retailer reports. Notable results will come from Best Buy, HP, JM Smucker on Tuesday; Salesforce, Five Below on Wednesday; and Lululemon, Dell, Dollar General, Broadcom, and Campbell Soup on Thursday.