Wentz Weekly: Stocks Slightly Lower With Stronger Economic Data

Wentz Weekly Insights
Stocks Slightly Lower With Stronger Economic Data

The major US stock indices were all lower last week, snapping a three week winning streak for the S&P 500 and Nasdaq, although the decline was less than 1% for all four indices. The S&P 500, Dow, and Nasdaq set a new record high on Monday but sold off mid-week before a small rally on Friday after solid economic data on income growth, consumer spending, and inflation. Meanwhile, the average stock, measured by the equally weighted S&P 500 was slightly higher.

It was a similar story in the bond market. After several weeks of drifting lower, Treasury yields moved higher (and bond prices lower) as many public comments by Fed policymakers leaned more hawkish and after receiving stronger economic data.

Second quarter GDP, the most broad indicator for economic growth, was revised higher with the latest estimate showing the economy grew at a 3.8% annualized rate in the quarter. This was 0.5% higher than the prior estimate (the revision is based on more complete and accurate source data) and was due to higher consumer spending and lower imports (imports subtract from domestic growth).

The current quarter, which ends Tuesday, is expecting strong economic growth as well – the Atlanta Fed GDPNow GDP forecasting model sees growth of 3.9% in the third quarter as consumer spending accelerated over the summer months.

Last week also saw a lot of notable comments from Fed policymakers. A small sample includes comments from Atlanta Fed President Bostic that said persistent inflation keeps him against backing another rate cut this year, saying inflation has been too high for too long and the labor market is not in crisis yet so does not warrant rate cuts. He continued that consumer psychology should be closely followed because once people experience inflation it is difficult to forget.

Chairman Powell had the most notable comments on Tuesday when he said near-term risks to inflation remain to the upside while risks to employment are to the downside, calling it a challenging situation to manage for policymakers. He added the “two-sided risks mean there is no risk-free path” which makes the Fed job more difficult. He said a number of labor market indicators remain broadly stable, but the pace of job creation is running below the rate required to keep the unemployment rate steady.

The number of comments changed market odds of the pace of rate cuts. The market has dialed back its odds for two or more rate cuts this year, and is increasingly pricing in just one cut this year, driving Treasury yields higher last week and may have been another factor in stalling the market rally. Newly appointed Fed Governor Miran, also the Chair of the Council of Economic Advisers to the Trump Administration, has been one of the outliers, continuing to call for much more aggressive rate cuts.

Meanwhile, there has been a pickup in scrutiny around artificial intelligence, with some calling it a new phase of AI capital expenditures. On Monday Nvidia announced a $100 billion investment in OpenAI to support its datacenter buildout. This sparked many headlines about a “circularity” or vendor financing dynamic where a company uses its balance sheet to support startups and other customers, who in turn use the funds and liquidity to secure its AI chips, according to FactSet. Recall Nvidia controls an estimated 95% of market share of AI related chips.

This week a lot of focus will be on the federal government and its need to pass a continuing resolution to keep the government running past the September 30 deadline Tuesday. If not, the government will head toward a partial shutdown, furloughing about 40% of workers and shutting down nonessentials. Democrats want to include an extension to the Affordable Care Act premium tax credit while Republicans want a clean continuing resolution, so far there are no signs of compromising yet.

This week includes many labor market reports, however if the government shuts down, there is a risk of delay in the reporting of the key monthly employment report from the Bureau of Labor Statistics. While a government shutdown is not uncommon and has minimal impact on markets, a delay to economic data, particularly the labor market which has been in focus, may create additional volatility in the days ahead.

Week in Review:

Despite a strong finish to the week on Friday, stocks still ended slightly lower to snap a three week winning streak. Volatility remained subdued but more hawkish Fed speak drove weakness in stocks mid-week and by time the week was over the major US indices finished as follows: Dow -0.15%, S&P 500 -0.31%, Russell 2000 -0.59%, and Nasdaq -0.65%. The hawkish Fed speak also drove Treasury yields higher with the 2-year Treasury yield rising 7 basis points to 3.65% while the 10-year yield rose 5 basis points to 4.18%. The dollar index rose 0.52% while the impressive run higher in gold continued, with the commodity rising 2.83% to another all-time high. Oil rose 4.85% on continued geopolitical uncertainty around Russia/Ukraine. Bitcoin fell 5.17%.

Recent Economic Data

• Personal Income & Outlays:
  • Personal income rose 0.4% in August, slightly more than the 0.3% increase that was expected and matching the 0.4% increase in July. Wages and salaries were up 0.3% and up 4.9% over the past 12 months. Much of the upside in income this year relates to government transfer payments, like social security benefits which are up 8.7% the past year, and Medicare which is up 13.5% the past year.
  • Consumer spending increased at a solid 0.6% rate in August, ahead of the 0.5% increase expected. Spending is up 5.4% over the past year, but up 6.8% annualized over the past three months, indicating a solid pickup in consumer spending during the summer months. Spending on goods was up 0.8%, up 5.6% over the past year, and spending on services rose 0.5%, up 6.3% over the past year.
  • The personal savings rate declined to 4.6% which is down to the lowest level of the year and below the 2010s average of about 7.5%.
  • The personal consumption expenditure price index, the Fed preferred inflation reading, increased 0.3% in the month as expected with core prices up 0.2% as expected. The year-over-year change was 2.7%, ticking up from 2.6% in July, while the change for core prices was 2.9%, matching July.

• New Home Sales: New home sales for August were much better than expected, with sales rising 20.5% in the month to a seasonally adjusted annualized rate of 800,000 new homes. This is 15.4% above the rate from a year ago and may indicate a renewed demand in homebuying after seeing mortgage rates fall to the lowest level since last October. The median sales price of a new home was $413,500, rising 4.7% in the month and up 1.9% from a year ago. Inventory of new homes still has not improved though, with available homes at 490,000, down a little over 1% in the month. The big rise in new home sales came mostly from homes that were still under construction, with sales from homes that haven’t been started yet rising but to a lesser degree.  

• Existing Home Sales: The number of existing home sales in August was slightly better than expected at a seasonally adjusted annual rate of 4.00 million, however basically unchanged from the month prior and increased just 1.8% from a year ago. Mortgage rates are at a one-year low, however the sales numbers are based on closings so reflects contracts signed in July. The median existing home price increased for the 26^th month (on an annual basis), rising 2.0% from a year ago. Inventory was lower in August, falling 1.3% to 1.530 million units, although up almost 12% from last August.

• Mortgage Rates: The average prime 30-year mortgage rate ticked up slightly over the past week as Treasury yields increased, snapping a nine week streak of decreasing mortgage rates. The average rate for a prime borrower was 6.30%, up from 6.26% last week which was the lowest since last October, although still down from the 12-month high of 7.04% from January.

• Durable Goods Orders: Orders for durable goods surprised to the upside in August following two consecutive declines. Orders increased 2.9%, which reverses a 2.7% decline from July, and was better than the 0.5% decline that was expected. Transportation orders drove much of the increase as orders for transportation increased 7.9% (which follows two large declines), but it wasn’t just transportation. Orders excluding transportation were up 0.4%, beating the 0.2% decline expected. More importantly, core capital goods orders excluding aircraft increased a solid 0.6%.

• GDP: The third revision to second quarter GDP was a positive one. The revised number, based on more complete source data, showed the economy grew at an annual rate of 3.8% in the quarter, up from 3.3% in the second estimate released a month ago. The upward revision was due to lower imports (which subtracts from GDP) and an increase in consumer spending.

• Jobless Claims: The number of unemployment claims filed the week ended September 20 decreased again, down 14,000 from the prior week to 218,000. The four-week average was slightly lower at 237,500. The number of continuing unemployment claims was down slightly to 1.926 million with the four-week average down to 1.930 million.

• Money Supply: The money supply, or the amount of money in circulation which includes cash, deposits at banks and money market balances, increased $79.6 billion in July, or 0.4%, and up $1.010 trillion over the past year, or 4.8%, for the fastest annual increase since mid-2022, but is near a historical normal growth rate. Recall the money supply increased at a record rate during the pandemic, fell in 2022 for about a year and has just resumed its normal growth rate.

Company News

• Apple: Shares of Apple opened last week higher after a report by The Information said Apple is pushing its suppliers to raise production of its entry level iPhone 17 model by 30-40%, suggesting demand is much stronger than initially expected. The report added Apple received more pre-orders than it expected last week.

• Nvidia: Nvidia and OpenAI announced a strategic partnership where Nvidia will make a $100 billion investment in OpenAI to build out and deploy at least 10 gigawatts of data centers with Nvidia’s chips, equaling millions of Nvidia’s GPUs. OpenAI will use the data centers to continue expanding its AI capabilities to train and run its next generation of models and eventually developing superintelligence. Separately, there have been some scrutiny lately around the “circularity” dynamic with Nvidia, where the company uses its balance sheet to support start-ups and other customers who in turn use the funds to acquire AI chips from Nvidia.

• OpenAI: OpenAI is reportedly exploring the possibility of leasing AI chips from Nvidia to reduce costs as part of the new partnership recently announced between the two, with the report saying it could save between 10-15%.

• Kenvue: The White House formally made an announcement linking the use of Tylenol (acetaminophen) during pregnancy to autism and the FDA will change to strongly recommend against using acetaminophen during pregnancy. Tylenol is made by Kenvue, a company that was spun off from Johnson & Johnson in 2022.

• Lithium Americas: The largest lithium miner in the US, Lithium Americas, nearly doubled after a Reuters report said the Trump Administration is looking to take an equity stake of as much as 10% as part of renegotiating terms of its $2.3 billion loan from the Department of Energy for its Thacker Pass project. The company was scheduled to pay its first part of the loan this month but due to concerns over its ability to repay, the administration is seeking different options. A WSJ report later said the company is experiencing a cash crunch and needs the government funds to operate and if a deal with the government is not made it may need to forego the project the loan was used for.

• Tesla: Reuters reported the Arizona Department of Transportation approved Tesla to begin testing autonomous robotaxis on public roads in the Phoenix metro area while using safety drivers onboard. The approval is based on self certification that Tesla submitted that it will abide by all traffic laws, licensing, etc. It is the second city is has been approved for testing, after Austin, Texas. CEO Musk has previously said Tesla aims to roll out robotaxi service covering half of the US population by the end of 2025.

• Intel: Bloomberg reported Intel has approached Apple about a potential investment, saying the discussions are in very early stages. The two companies are also talking about how to work more closely together and would add further validation to Intel’s turnover efforts, the report notes.

• TikTok: A deal was signed by President Trump regarding the fate of TikTok, declaring the proposed divestiture meets all requirements under US law, after China and all other parties involved agreed to conditions laid out by the US. Under the plan, a new US based joint venture would hold majority control of TikTok while ByteDance (the Chinese company that currently owns TikTok) will hold less than 20% of the stock of the new company. Key investors in the joint venture include Oracle, Silver Lake, Michael Dell, MGX (Abu Dhabi based investment group), and Rupert Murdoch. The US entity’s valuation is reportedly around $14 billion.

Other News:

• Fed Speak:
  • Chairman Powell: Fed Chairman Powell made a speech Tuesday where he talked about near-term risks to inflation tilted to the upside while risks to employment are to the downside and called it a challenging situation for the Fed to manage, saying “two-sided risks mean there is no risk-free path.” He said a number of labor market indicators remain broadly stable, but the pace of job creation is running below the rate required to keep the unemployment rate steady.
  • Atlanta Fed President Bostic said persistent inflation keeps him against backing another rate cut this year, saying he saw just one rate cut this year because of inflation that has been too high for too long and he does not believe the labor market is in “crisis” right now so does not warrant more rate cuts yet.
  • St Louis President Musalem said there is limited room for further rate cuts since inflation remains above the Fed’s 2% target, however if there is further deterioration in labor market and anchored inflation he could see more room for rate cuts.
  • Cleveland Fed President Hammack said she thinks the Fed should remain very cautious in removing policy restriction (lowering interest rates) because of the continued upside risk in inflation. She thinks the labor market is still in good shape and lowering rates too soon would cause an “overheating again.”
  • Atlanta Fed president Bostic said the Fed should still worry about inflation since it has been above trend for a long time and there could be more. He said if prices move further away it could lead to a very difficult response which calls for the Fed to stay vigilant. He went on to talk about paying attention to consumer psychology, saying once people experience inflation it’s difficult to forget.