ANGLES.

The stock market was open on Monday although the bond market wasn’t and it had its first chance to react to the latest flare up of the conflict in Israel and Palestine that broke out over the weekend. Wall Street tries to frame everything in dollars and cents, because, well, that’s its job - but it can often appear a little dazed and confused when it comes to having to suddenly price in geopolitical risk.

After a predictable dip at the open, stocks recovered to push into positive territory by the close, driven higher not only by bouncing from an over-sold position, but also by the market’s attention being caught by suggestions from Fed officials that the bond market may actually be doing their job for them by driving interest rates higher - the interpretation being that no more rate hikes may be needed from the central bank. Gold and oil prices both shifted higher on the onslaught of news coming out of the Middle East.

The feel-good factor continued into Tuesday as stocks powered higher on the back of more Fed chatter talking down the need for further interest rate increases. Traders also began to position themselves in front of Thursday’s latest inflation figures. As always when stocks move higher from being oversold, momentum was turbocharged by both BTFD’ers and algorithmic and program trading.

Wednesday was quietly positive. The main event of the day was the release of the minutes of the most recent Fed interest rate committee meeting. The main takeaway was that Fed officials now see their policies to be “restraining the economy as intended.” Another up-day for most stock indexes as this apparent central bank mood was deemed to make further Fed interest rate hikes even ess likely.

When the all-important Consumer Price Index (CPI) measure of retail inflation dropped pre-market on Thursday morning, we learned that inflation rose 0.4% from August to September, slightly more than the expected 0.3% pace, while the Core rate excluding food and energy came in right at the 0.3% that was projected. The headline inflation rate remained unchanged at 3.7% annualized, but the (more important, as far as the Fed is concerned) Core version fell to 4.1%, its lowest in two years. Housing-related costs are proving to be particularly stubborn.

While these numbers didn’t move the needle much in terms of expectations (or lack of them) about a rate increase at the next Fed meeting (see FEDWATCH INTEREST RATE PREDICTION TOOL below), the apparent stickiness of inflation (also indicated by the previous day’s Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers) did seem to bolster the “higher for longer” interest rate case (fewer and more delayed rate cuts in 2024 than the market has yet priced in) and stocks gave back much of the week’s gains, with Small Caps particularly hard hit.

The world may be falling apart, but the kick-off to Q3 earnings season on Friday showed that banks are still able to make good money. JP Morgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) all reported positively. The broad stock market, however, meandered aimlessly lower throughout the day, but the S&P 500 just about managed to eke out a fractional gain for the week.

The baseline is still for the Fed to hold rates steady for the rest of the year but non-negligible risks of another rate hike do exist, although the market is still choosing to disregard this risk right now which will make the reaction more violent if it does come to pass.

It always helps to remain focused on the overarching drivers of the markets, and for right now that is still the “Three Pillars of the Rally” that I always talk about (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes). While these three underlying supports for stocks remain in place the market could well remain largely rangebound within, generally speaking, the 4200-4500 range for the S&P 500. In mid September, the index was at the upper end of that range, trading around 4500. Recently, the S&P 500 has traded down towards the bottom of that range, nearer to 4200.

Aside from U.S. government bonds starting to trade like effing GameStop, not much else has changed. Economic growth remains solid, there are still signs inflation is declining and the Fed is still done, or almost done, with rate hikes. S&P 500 above 4500 seems unsustainable with market interest rates where they are but equally below 4200 is not justified by any data and the still-healthy state of the Three Pillars. So we may be saddled with bouncing around within this range until something breaks.

Forced to choose, I’d say that the list of what can go wrong to break us out of this range to the downside (continued yield spikes, growth slowing significantly, inflation bounce back, more rate hikes, geopolitical shock, oil price surge, banking stress) seems to be a little more on the cards then the list of what could go right to break us north through the upside (more and more Goldilocks data, immaculate disinflation, geopolitical surprise, Fed officially signals that it’s done raising rates).

OTHER NEWS ..

And Another Crypto Demi-God Is Behind Bars .. Three Arrows Capital co-founder Su Zhu is in jail in Singapore after local authorities lost patience following months of stalling and sparring over locating the failed crypto hedge fund’s customer assets. Following a tip-off off that Zhu was headed to Changi Airport from his luxury mansion famous for its lavish parties, they moved in and nabbed him.

Zhu and fellow co-founder Kyle Davies are among the one-time darlings of crypto’s pandemic-era bull run whose reputations subsequently suffered as boom turned to bust, exposing risky practices and widespread fraud.

Three Arrows imploded in 2022 as leveraged bets blew up, starting a $2 trillion crypto rout that contributed to a spate of other collapses in the sector including Sam Bankman-Fried’s FTX. Zhu and Davies are accused of failing to cooperate with the probe into the collapse and authorities are seeking to recover $1.3 billion from the two.

Trouble In The Happiest Place On Earth .. Disney (DIS) hiked streaming prices yet again on Thursday as the company continues to grapple with poor profitability and collapsing subscriber numbers. The price increases are the second so far this year and impact the monthly price of the company's ad-free Disney+ and Hulu plans in addition to its ESPN+ subscription.

As a result of the hikes, the price of the Disney+ ad-free plan jumped to $13.99 a month in the US, up from the prior $10.99. That's now double the $6.99 monthly cost Disney charged for the service when it first launched in 2019.

Drown Your Sorrows In Style .. Looking for one of the world’s top bars but can’t get there? Don’t worry. The World’s 50 Best Bars has your back and made a second, less vaunted list offering rankings 51-100. Entries include Martiny’s in New York and there’s even a place in Albania: Nouvelle Vague in Tirana.

UNDER THE HOOD ..

The S&P 500 index SPX closed on Friday at 4328, up a fraction for the week. The next upside resistance points are to be found at 4370, 4425 and 4460. Downside support levels are at 4305, 4282 and 4260.

The overall, longer term trend in the major indexes just about remains to the upside, but beneath the surface, its health leaves a lot to be desired. Basically, this bull market is not checking all the boxes, but conditions still just about remain more bullish than bearish.

The ratio of the performance of Small Cap stocks vs Large Cap ones has reached a multi-year low and is currently below its low even at the height of the pandemic in 2020. What this tells us is that investors prefer owning larger stocks, which theoretically carry lower risk than smaller ones.

I know I keep banging on about it, but here we go again .. such risk aversion to smaller stocks, especially during a bullish trend such as we have experienced since October 2022, is not at all typical of a healthy and sustainable advance for the en…

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Stocks eventually ended a little higher for the week but it was a tough slog getting there with interest rates continuing to push ever higher (see AVERAGE 30-YEAR FIXED RATE MORTGAGE below) and a bizarre Jobs Report on Friday.

Monday started out quietly. There was some relief at no government shutdown but an awareness that the can is now lying just a little further down the road and nothing had really changed. Markets quickly resumed their recent short-term path of least resistance by moving lower, with Small Caps once again leading the way downwards.

Tuesday proved to be a very busy, consequential day. Employers reported having 9.6 million job openings at the end of August, according to a seemingly white-hot Job Openings and Labor Turnover Survey (JOLTS) report, up a mind-bending 690,000 from July, driven by a particularly large surge in professional and business services openings.

Taken at face value, that would seem to suggest that corporate America is ramping up hiring plans once again. On the surface, that is deemed to be highly inflationary. Markets ran with the negativity and Tuesday ended up as a horrible day for both stocks and bonds, with market interest rates surging even higher.

And the chaos in the asylum that is Congress reached new highs (lows?) with the historic constitutional assassination of House Speaker McCarthy driven by a few extremists in his own party. The legislative branch of the U.S. government is now in utter disarray and the chances of avoiding the next shutdown when the current government funding deal ends on November 17th (and potentially many more after that) are rapidly shrinking. An extended shutdown absolutely has the chance to help sabotage a soft landing for the economy.

Wednesday saw some welcome relief as weekly jobless data painted a less inflationary picture than the JOLTS numbers in advance of the big release of the Jobs Report on Friday and oil prices plunged 5% in the session. Interest rates eased somewhat and stock market buyers cautiously dipped their toes back in. Markets drew a breath ahead of the jobs data on a largely unchanged Thursday.

After the blowout Jobs Report came out before the market opened on Friday (see below), stocks’ initial knee-jerk reaction was to crap out on heightened fears that the Fed may now pull the trigger on another interest rate hike before year-end as a result and a strengthening of the “higher for longer” interest rate narrative. A more sober reading of the data as outlined below, however, saw stock prices recover sharply and end the day higher, locking in small gains for the week.

This Jobs Report was widely described as just plain “weird”. It showed a blockbuster headline figure of 336k new payrolls in September, more than double the expectation. The prior two months were also revised up by a combined 119k jobs.

Yet found behind the headline were plenty of details to support the idea that inflation is most definitely on the way down, particularly in an area on which the Fed has been most focused: wages. Average hourly earnings rose only 0.2%, the mildest monthly gain in nearly a year and a half. Also, the unemployment rate remained unchanged at 3.8% in September, despite the enormous increase in jobs created. It was this data that turned stocks around after the initial nosedive on Friday.

Things are just batshit crazy right now in the usually rather boring world of US government bonds with interest rates crashing around like a bird trapped in an small attic. Markets seem to be acting like a precocious toddler, testing the boundaries at which things break. Is it 5% interest rates on your bonds? No? How about 5.25%? Are 7.0% mortgage rates high enough? No? How about 7.50%?

It’s one thing to see extreme volatility in stocks or even junk bonds, we all signed up for that. It’s quite another to observe it in U.S. Treasury full-faith-in-credit instruments whose traditional role has been as buffers to the risk in the stock portion of everyone’s portfolios from most individual investors to banks and pension funds.

The sense is growing that if rates continue to rise the way they’ve been rising, there will eventually be a financial accident somewhere. More bank failures? Commercial real estate finally falling off a cliff? YUC collapses? A housing market crash? Take your pick.

Any of these things could trigger a recession and much lower stock prices and the Fed may well then have to react by beginning to cut interest rates sooner than they plan to and risk looking foolish at best and incompetent and destructive at worst. The problem of course is that by then it will be too late for Fed rate cuts to have any meaningful effect.

In the past few weeks the U.S. stock market has erased all of its gains of the past few months. The summer of 2023 came and went and we have nothing to show for it. As of right now, only 25 out of 500 companies are responsible for the 12% year-to-date gain in the S&P 500 and while that is up from just seven that represented the entire rally back in May, it still shows a concerning lack of breadth and is further evidence of how just looking at index performance does not necessarily give you the full picture of what is happening to the average stock.

OTHER NEWS ..

TGI Thursday lunchtime? .. JP Morgan CEO Jamie Dimon said artificial intelligence is already being used by thousands of employees at his bank and is likely to make dramatic improvements in workers’ quality of life, even if it eliminates some jobs. The bank advertised for more than 3,500 related roles between February and April.

“Your children are going to live to 100 and not have cancer because of technology,” Dimon said in an interview on Bloomberg TV. “And literally they’ll probably be working three-and-a-half days a week.”

Elon gives the regulator the finger .. The US Securities and Exchange Commission (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) is seeking to force Elon Musk to testify as it investigates the billionaire’s purchases of Twitter Inc. shares ahead of his takeover of the social media platform. The Wall Street regulator said on Thursday that Musk failed to appear to testify last month as requested, and has now asked a judge to force him to. The agency is reviewing Musk’s statements and disclosures about the stock transactions.

Before acquiring all of Twitter, Musk first purchased a 9.2% stake in the social media firm in March 2022. He did not disclose the stake to the SEC until a month later. The agency’s rules require that people who buy more than 5% of a public company disclose it within ten days.

The SEC began its probe in April 2022 and has requested thousands of documents from Musk and other parties, the agency said. He has apparently only sent a few hundred documents in response, withholding the rest. He originally agreed to sit down for an interview with the SEC last month, but two days before the meeting, Musk suddenly raised several objections, including one that he didn’t want to meet in San Francisco. Investigators even agreed to move the questioning to Fort Worth, Texas, near where Musk now lives to accommodate him - but then he decided that he wouldn’t attend the interview at all.

It’s possible, of course, that he was too busy designing more and more convoluted pricing models to try and make his comically overpriced purchase of the Twitter platform ever so slightly less disastrous.

UNDER THE HOOD ..

The S&P 500 index SPX closed on Friday at 4308, up a little for the week. The next upside resistance points are to be found at 4370, 4425 and 4460. Downside support levels are at 4305, 4273 and 4185.

We are almost at the one year anniversary of the 2022 stock market lows on October 12th. Since then, the S&P 500 Large Cap index is up 20%, the tech-heavy NASDAQ-100 up 38% and the Russell 2000 Small Cap Index up only 3%. Clearly size does matter.

Technical crosscurrents within the market are strong, drawing battle lines between an oversold short-term condition implying higher prices and …

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The month of September duly lived up to its stock-killing reputation and there was a strong sense of good riddance from investors as markets closed on Friday. On the bright side, Octobers following losing Septembers have a history of being rather good for stock prices and November to December is historically a strong season.

Last week began with a predictable but mild snap-back rally on Monday after the carnage that had followed the outcome of the most recent Fed meeting the week before. But the relief was short-lived. By Tuesday, markets across the board were back in freefall after consumer confidence and expectation readings cratered and data showed new home sales plunging almost 9% in a month.

The mood was also not helped by announcements that Amazon is getting sued by the Federal Trade Commission (FTC) and by 17 states for so-called monopolistic practices and that Target is closing nine stores in four states, including one in Manhattan, due primarily to massive levels of organized retail theft (or “an increase in shrink” as corporate-speak calls it) and attacks on store staff.

The market took a breather on Wednesday and ended the day little changed - which was actually quite an impressive performance in the face of a big jump in oil prices that day to the highest level in over a year, a still-ripping US Dollar and the highest 10-year Treasury interest rates since Shaggy strongly protested that it wasn’t him in late 2000, dragging mortgage rates even higher (see AVERAGE 30-YEAR FIXED RATE MORTGAGE below).

And, of course, the sense then was that we had all moved one day closer to the world’s most pointless and unnecessary government shutdown caused by the “Burn It All Down” mob in Congress making a fool of the clueless and impotent Speaker Of The House. In the end, it seems that the can is simply being kicked down the road by a 45-day reprieve in last minute stop-gap measure which means we’ll likely go through all this utterly embarrassing s**t again before Thanksgiving.

Investors came back in with some cautious dip-buying on Thursday, sensing perhaps that things had maybe fallen a bit too far a bit too fast and both surging oil prices and the rocketing US Dollar pulled back a bit. But the buying felt like it lacked any passionate enthusiasm as stock prices seemed to tick up only grudgingly.

Friday saw a resumption of the slide after a brief morning spike resulting from some hopeful inflation data (see below) ran out of steam and hopes of avoiding a government shutdown seemed to evaporate. Wall Street traders trudged home in a horrendous Manhattan rainstorm, which seemed to sum up another gloomy week that ended a pretty miserable month and a difficult quarter (watch out for my Quarterly Market Review in the next few days).

There is a slight whiff of stagflation in the air (the toxic simultaneous combo of high inflation and unemployment and slowing growth, see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and that is a bad smell for stock markets. Any further data releases that point in that direction are not going to be well received by investors as they may pose an existential threat to the validity of the “Three Pillars” (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes) upon which this year’s rally has been built. Indeed, these pillars are single-handedly the only rationale for stock prices being any higher in 2023 than they were in 2022 and if they begin to crumble then so could the entire stock market.

The final revision of Q2 Gross Domestic Product (GDP) showed last week that the rate of economic growth in the U.S. was unchanged from the second estimate, holding steady at an annualized rate of 2.1%. We also learned on Friday that the Fed’s favorite inflation measure, the Core Personal Consumption Expenditures (PCE) Price Index increased just 0.1% in August, lower than expected, indicating an annual core inflation rate of 3.9%, in line with expectations.

For a further meaningful decline to occur in stocks, we will have to see: 1) a clear slowing of growth and/or 2) a real rebound in inflation. To be clear, the data is not yet showing either of these right now and that’s a good thing.

Looking forward however, if the data does show either or even both problems occurring, do not be at all surprised by a swift 10-15% fall in stock prices (likely worse than that for tech names and YUC stocks) as the Three Pillars deteriorate. If the data shows that neither problem is happening, the S&P 500 could easily rally back a couple of hundred points higher from here. And, if the data remains mixed, contradictory or inconclusive, then expect conditions to continue to be choppy around current levels until such time as things break one way or the other.

So, what does a “Good” Outcome look like?

* More “good” inflation reports, meaning that the Consumer Price Index (CPI) and Core PCE Price Index are flat or decline further

* Goldilocks growth including no decline in retail sales and no spike in consumer credit

* Mild and gradual softening of the labor market - monthly job creation in the mid-to-low 100k area, job openings back below 8m.

* An end to expected Fed interest rate hikes and at least two rate cuts in 2024.

* A solid Q3 earnings season, which begins on October 13th, particularly from the so-called Magnificent Seven, that’s Apple (AAPL), Alphabet (GOOGL), Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT), Meta Platforms (META) and Tesla (TSLA)

* Any government shutdowns only last for a few days at most.

What does a “Bad” Outcome look like?

* Inflation rebounds - CPI and Core PCE Price Index rise

* We get a growth scare e.g., retail sales fall, consumer credit deteriorates

* The labor market does not soften, meaning unemployment does not rise back up to around 4% and/or job openings remain stubbornly high.

* Markets come to expect another interest rate hike (probability viewed as being over 50%) and either zero or only one rate cut in 2024.

* Disappointing earnings for Q3 in general, but for the Magnificent Seven in particular

* Any government shutdowns last for two weeks or more

OTHER NEWS ..

Less For More .. Buying a home or car right now is proving unaffordable for many American households because of the toxic mix of massively higher borrowing costs and much higher prices. Consumers in the market for loans to buy homes and cars are discovering that, because of the Federal Reserve’s relentless 18 month campaign of interest rate increases, their money gets them a lot less than it did a few years ago. Meanwhile, those with credit cards and other loans that carry rates pegged to broader interest benchmarks like the 2-year or 10-year Treasury rates are finding that their balances have gotten much more expensive to maintain. 

A Wall Street Journal report estimates that the typical American household would now need to use 42 weeks of income to buy a new car, up from 33 weeks just three years ago. And, as reported in last week’s issue of Angles, the National Association of Realtors now calculates that the typical American family can no longer afford to buy a median-priced home. 

Another One Bites The Dust .. The Wall Street Journal reported that Hong Kong’s criminal investigation into crypto platform JPEX has led to the arrest of at least 11 people last week with allegations that it defrauded investors of $192 million. Police swooped in just days after the securities regulator warned investors that JPEX lacked a regulatory permit and that users had been blocked from withdrawing their funds. and platform providers were ordered to block its website and app locally. Hong Kong’s response comes after it introduced a strict new regulatory regime for cryptocurrencies four months ago. 

The WSJ report quoted Lily Fang, professor of finance and dean of research at INSEAD business school near Paris, as saying “This unfortunately shows that allowing retail trading in this space, which is known to be fraud-prone, when investor education is sorely lacking, is a mistake.”

Not …

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Last week was always going to be about Wednesday’s Federal Reserve meeting and its fallout. We are undergoing a major shift from the question being “How high will interest rates go?” (the market’s obsession over the last eighteen months) to “How long will interest rates stay high?” going forward.

It is now the answer to this second question that will determine if the Fed’s stance is deemed to be hawkish (bad for stocks/bonds) or dovish (good for stocks/bonds). For any rally to continue, markets need, at a minimum, for the Fed to meet current expectations of (almost) no more rate hikes and, ideally, hint at rate cuts sooner rather than later. 

The 2023 rally has been fueled by the economy and inflation both being “not as bad as initially feared.” But at this point, the fear has evaporated and as such the market has now lost the power of positive surprises. To fuel another leg higher, we need a new catalyst and the next possible candidate was the endorsement of the idea of rate cuts in early-to-mid 2024.

The Fed has one eye on Detroit. Unions all over the country are under pressure from a membership grappling with monthly bills going up for the basics, from gas to food to child care to be more aggressive in pay negotiations. And this could well have the end result of making higher inflation stickier and harder to kill and possibly pushing the Fed into a more hawkish posture.

When it came out on Wednesday, the announced decision to leave the Fed Funds interest rate unchanged surprised absolutely no-one, but there were some nuggets in the quarterly “dot-plot” data to pore over.

For instance, the median policy maker on the committee now sees core inflation ending the year at 3.7%, down from 3.8% currently and from their 3.9% estimate back in June. As for interest rates, their median projection was for one more quarter-point rate increase sometime before the end of this year. There are two meetings left to do this, in November or December.

But the biggest shift in projections was for interest rates in 2024. The median estimate is now for the Fed Funds rate to end next year at 5.1%, which is a full half point higher than the prediction of last June and only a quarter of a point below where it is now - essentially pricing in just one or a maximum of two rate cuts before 2025.

Bottom line: The Fed used Wednesday’s statement, dots and press conference to send a strong message to financial markets that interest rates are going to stay higher for longer, get used to it.

Stock investors and professional traders were not impressed that their dream narrative of an orgy of interest rate cuts throughout 2024 was being undermined and equity prices fell hard. Tech stocks in particular took a swan dive right after the announcement.

The plunge continued into Thursday, further accelerated by a surprising fall in weekly jobless claims numbers and although the rate of decline eased a little on Friday, it was a fourth consecutive down-day and the S&P 500 index notched its worst week since March. Along with all the other indexes, it’s now moved into oversold territory and at least a short term relief rebound can be expected early this week.

The Fed is trying to read tea leaves in the dark. There are many naysayers and they were especially vocal following the release of the dot-plot projections which appear to assume a very rare, some say almost impossible, “Goldilocks forever” scenario of continuing steady growth combined with a low unemployment rate and inflation falling back to the Fed’s target of 2% by 2026.

Elsewhere, central banks raised interest rates in Sweden, Norway and especially Turkey (up 5% to 30%!) while those in the UK, Japan and Switzerland caused something of a stir by leaving their rates unchanged.

House Speaker Kevin McCarthy’s already-weak position is getting even more fragile as he appears to have now lost control of the scruffy riffraff of radical rebels in his own party who are giving him the finger and becoming even bolder and more manically destructive, now with the full blessing of the likely Republican candidate in next year’s election. As a direct result of this mutiny and McCarthy’s frankly pathetic ineffectiveness in fighting it, a government shutdown (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) next weekend is shifting from being a possibility to a likelihood.

It is estimated that a lapse in federal funding could cut 0.2 percentage points from the quarterly GDP growth rate for each week that it lasts and so an extended shutdown theoretically has the capability to simply by itself tip the U.S. into a recession. A shutdown also risks derailing the timely collection, accuracy and even publication dates of key economic data, which would likely blind the Fed in a fog of ignorance and uncertainty and make future data revisions more dramatic and market-impactful. The Fed always insists it is data-dependent, what's it to do when the data runs dry?

There remain two primary events that could cause see the recent pullback in stocks to spiral out of control. The first is a Growth Scare. Sentiment that assumes a soft landing is still dangerously complacent. If the markets actually start to believe this whole “rates-higher-for-longer” thing (and they’re starting to) then worries about a growth slowdown will begin to rise (especially with a looming shutdown and increasing labor strife), which could easily end up triggering a 5%-10% price decline from here.

The second is an Inflation Rebound. If the Fed suddenly signals it could hike rates more than once (which could happen if inflation bounces back in the next few readings) then that would send market interest rates even higher and weigh heavily on stocks, as the “Fed almost done” and disinflation pillars of the 2023 rally could come under serious attack.

OTHER NEWS ..

Home Affordability Is At Its Worst For Decades .. For the first time since the 1980’s, the median U.S. income is not adequate enough to qualify for enough of a mortgage to buy the median-priced U.S. home (based on a 20% downpayment).

Another Not Great Week For Elon .. Hot on the heels of a biography that described him as a “man-child” and exposed his toxic and bullying behavior as well as having to defend himself against charges of increasing poor judgement calls in that he provided assistance to Putin and Russia by ordering the strategic jamming of internet access to Ukrainians and, bizarrely, quickly jumped in last week to naively tweet his support and encouragement for Russell Brand, the dim-witted, never-been-funny and utterly talentless alleged celebrity rapist, before even looking at the highly compelling evidence of guilt that was publicly released, Elon Musk is now facing off with the Justice Department who have launched a criminal investigation into Tesla’s unsatisfactory disclosure of benefits the company paid him, including a house.

This is hardly Musk’s first rodeo when it comes to playing fast and loose with the truth about his businesses and breaking financial regulations. He paid a $20m fine and was forced to step down as chairman of Tesla after the Securities and Exchange Commission (SEC) found that he lied to shareholders and the public back in 2018 in order to try and manipulate Tesla’s stock price for his own benefit. An increasing number of Tesla shareholders are becoming rather concerned at his tendency towards impetuous and reckless conduct which seems to be impacting their investment. Tesla stock has significantly underperformed the NASDAQ index since Musk took over Twitter in late October 2022.

Flooding Trouble .. A federal program that provides critical flood insurance is set to lapse unless renewed by the end of the month, potentially stranding new home buyers in need of coverage. The National Flood Insurance Program provides a safety net for the increasing number of communities that are vulnerable to flooding and might not have access to any other coverage.

Now lawmakers are deadlocked over extending the program, which is…

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Reuters, Bloomberg and the Wall Street Journal all published articles last weekend essentially saying that the Fed is done with interest rate hikes and while that’s hardly new news, it helps counter some of the somewhat negative narratives that are emerging as investors step back to assess the state of the economy and the business cycle looking towards the end of the year.

It’s leading to an increasingly popular stance among traders and investors of “strongly neutral” on stocks and bonds as markets seem to be lacking any faith in pushing things in either direction. Being strongly neutral does not imply no opinion - you do have an opinion; it is that you have no strong conviction at the moment to buy or sell.

There is a recognition that there could be some legitimate negative surprises lurking. A few examples ..

Energy costs are one of the big wild cards that the economy is facing right now. Sustained high energy prices could cause a significant reversal in headline inflation (although not core), forcing the Fed to take more aggressive action than stock markets are prepared for. Gasoline at a national average of $4 a gallon seems to be the threshold where energy prices start to become a more serious drag on consumer spending in general. Oil prices have surged almost 30% since the end of June.

The United Auto Workers (UAW) union began an unprecedented and targeted strike at Detroit's big three automakers (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) – General Motors (GM), Ford Motor (F), and Stellantis (STLA) on Friday, but then promptly announced that they expected to be back at the negotiating table again at the weekend. A prolonged strike has the capability to raise auto prices, significantly harm suppliers and could send shock waves throughout the overall economy.

There are continued and growing worries about a government shutdown on September 30th as the small but loud rabble of Congressional trouble-makers show no signs of developing any degree of financial or economic intellect whatsoever as the deadline nears. They are instead furiously handing House Speaker Kevin McCarthy the bill for the price of his chaotic selection earlier in the year when he won only by making a multitude of promises to all corners of his party.

Last-minute fears of a maybe hotter-than-expected report of the Consumer Price Index (CPI) measure of retail inflation the following day was a drag on tech stocks on Tuesday. The CPI data can impact all of the Three Pillars Of The Rally (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes). It also didn’t help the tech sector that the legal problems of Alphabet Google (see OTHER NEWS below) were front and center that day and Apple’s “big product event” was mostly met with a very unimpressed yawn, failing to divert attention away from the company’s potentially serious issues in China.

When the data was released on Wednesday morning, we learned that CPI rose 0.6% from July to August, the largest month-to-month jump since June 2022. Gas prices, which surged 10.6% over that time, were responsible for more than half of the increase. The headline rate of inflation is now 3.7% annualized, up from 3.2% a month ago. But more importantly, Core CPI, which excludes the more volatile food and energy price components, only rose 0.3% in the last 30 days and 4.3% over the last year, a little lower than expectations.

Markets decided that, despite the fact that the inflation genie is not yet back in the bottle, all this CPI data essentially cancelled itself out and that this was basically a nothing-burger. Stock prices just churned sideways for the most part on Wednesday.

The probability of no change in interest rates at next week’s Fed meeting ticked up to a virtual certainty at 99% (see FEDWATCH INTEREST RATE PREDICTION TOOL below), although the odds of a hike at the November meeting did inch a touch higher.

Things are not the same in Europe where stagflation (economic contraction combined with still-high inflation) is becoming a real risk and the European Central Bank (ECB), was last week forced to raise interest rates for the tenth consecutive meeting by another quarter of a percent.

When it came out the next day, CPI’s wholesale cousin, the Producer Price Index (PPI) measure of wholesale inflation faced by manufacturers confirmed the stubbornness of higher prices but with the caveat that a lot of it was down to the possibly temporary impact of higher oil prices and that the Core inflation measures were still progressing quite well in a downward trajectory.

Retail sales also rose by more than expected, Thursday’s data emphasized the refusal of the American consumer to roll over - but since it is measured in dollars spent, some of this can again be put down simply to forced higher spending at gas pumps around the country.

Still, markets were impressed and Thursday saw a nice spike in stock prices, before then giving it all back again on Friday as a huge futures and options expiration exacerbated renewed fears about industrial conflict and the looming possible government shutdown and it ended up being a losing week for stock indexes albeit on very low trading volume, particularly the NASDAQ and tech and tech-adjacent sectors.

There is one more lurking problem under the surface that could bring a sudden end to the seemingly endless consumer spending boom. By the Fed’s own statistics, and backed up by a recent JP Morgan report, Americans have now pretty much spent all the excess savings they had built up during the COVID era from the combination of government stimulus and their inability to spend for months on end.

Over the last couple of years, these excess funds have acted as a buffer to help shield consumers and the economy in general from the damaging effects of high inflation and maintained a eye-poppingly high level of consumer spending month after month. That buffer is now probably gone and if the Three Pillars start to noticeably deteriorate, there is far less protection against a significant and rapid downturn in economic conditions and therefore stock prices.

OTHER NEWS ..

NYC Rents Finally Cooling Off?.. Manhattan’s rental market is showing signs of hitting a limit as prices in August plateaued during what’s typically the most expensive time of the year for new tenants, as reported by Bloomberg. The median rent for new leases signed last month was $4,400, unchanged from the record set in July. The steadiness suggests that renters have reached a breaking point after rents climbed 7.3% from a year ago and are up 35% from August 2021.August is often the peak of the leasing season, with renters looking to move in before the school year starts. But it ended up being a slower month compared with May and June. The number of new leases in August dropped 14% from a year earlier.

The number of available apartments shrunk from July, suggesting that renters are choosing to renew leases rather than braving the market to find a new place to live. Last month, 11% of leases were signed after bidding wars compared with 19% a year earlier.

In Brooklyn, rents also appear to have peaked. The median price was $3,850 in August, $100 less than a month earlier. The number of new leases fell more than 40% from a year earlier.

Google In The Dock .. Google parent Alphabet (GOOGL) was put on trial in Washington DC last week on Justice Department charges that it violated anti-trust laws. The government’s case in the civil trial focuses on Google’s search practices and whether the company used illegal agreements to cut out competitors, harming consumers and advertisers in the process. The case is expected to last until mid-November.

Mexico Is The New #1 .. US-China tensions are rewiring global trade as the US seeks to reduce supply-chain reliance on geopolitical rivals and source imports closer to home. Mexico looks better placed than almost any other country to seize the business opportunities being created by this new Cold War.

It has …

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U.S. markets found themselves heavily impacted last week by a number of decisions made from beyond its shores. The United States and China continue to trade jabs, particularly at each other’s tech giants and it’s having an effect on the stock market.

Apple stock (AAPL) is probably the largest holding in most investors’ total market and large cap fund portfolios and it fell hard, swiftly shedding over $200 billion in market value following Wednesday’s report that China now plans to expand its ban on the use of iPhones to government workers at state firms and agencies.

Apple currently earns over 19% of its revenues in China. The company’s woes (which also included a tongue-lashing last week from U.S. regulators about being overly restrictive in allowing access to payment apps) caused collateral damage to stock prices in some other parts of the tech sector last week before staging something of a recovery on Friday.

In the other direction, it was announced last week that the value of Chinese direct investments in the U.S. plunged to below $2.5 billion last year, less than half of 2021’s figure and the lowest since Beyonce first gave her shout-out to all the single ladies in 2009.

In Saudi Arabia, an extension of the country’s oil production cuts was announced and Russia confirmed export limits collectively totaling a drop of 1.3 million barrels/day worth of supply. That sent oil prices soaring to new highs for the year, directly impacting the U.S. economy (see EXPLAINER: FINANCIAL TERM OF THE WEEK below). This adds further upside pressure on market interest rates, which continues to weigh on Small Cap stocks in particular as these companies are more reliant on debt financing to fund their operations than larger companies with greater cashflows.

President Biden was in India, entering talks with other world leaders (well, minus Vladimir Putin and Xi Jinping) at the G20 summit and, a month out from their annual meetings, the International Monetary Fund and World Bank were both subjected to a stern finger-wagging lecture from the U.S. Treasury about their “increasing mission creep” (notably their apparent recent shift to becoming climate change experts rather than financial and economic ones) distracting them from their core traditional roles of being laser-focused on global stability and growth.

While futures markets remain convinced that there will be no Fed rate hike this month (see FEDWATCH INTEREST RATE PREDICTION TOOL below), they are repricing the odds for one at the following meeting in November to slightly favor a quarter point increase then and are also beginning to push out the expected date of the first interest rate cut into the long grass of the second half of 2024.

The Labor Day-shortened week kicks off the stretch-run to year-end as well as the beginning of the traditionally rocky period that I mentioned in last week’s report. I want to clearly articulate the two biggest risks to the 2023 year-to-date rally that I believe we need to watch out for in the coming weeks.

Risk #1: Inflation Bounces Back. If inflation doesn’t just refuse to die but actually bounces back and the Fed has to keep raising rates, that will hit stocks and bonds hard as stock valuation will become more and more unattractive (this is what happened in August) and the chances of a hard landing will rise, with potentially disastrous results for stock prices, as this scenario has simply not been baked in to where valuations are right now.

Risk #2: Growth Slows Too Much. The U.S. economy is losing momentum - that much is clear and not, of itself, a bad thing for stocks in the short term. If growth data starts to implode however, then concerns will emerge the Fed has gone too far with its rate hikes. By that point, rate cuts won’t help materially because even if the Fed starts slashing rates, it’ll likely be too late by then to prevent a stock-killing growth slowdown.

The Three Pillars of the Rally that I always talk about (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes) remain in place for now but if either (or both!) of these two risks above come to pass, that would materially damage the entire structure upon which the whole 2023 rally has been built and at that point the advance would be compromised with potentially serious consequences for stock prices.

I will be keeping a close eye on the data that could give clues about these risk factors, starting with the latest Consumer Price Index (CPI) of retail inflation and Producer Price Index (PPI) of wholesale inflation experienced by manufacturers, both out this week.

News was mixed last week. Stocks reacted nervously when the weekly jobless claims number came out at its lowest level for seven months, somewhat denting recent optimism that the labor market may be cooling down. On the other hand, for the third time this summer, Goldman Sachs lowered its odds of a U.S. recession arriving in the next 12 months to just 15%, down from 35% in March, with only a “shallow and short-lived economic slowdown” expected for this year.

Summarizing the current situation; the data is wavering a bit but still hinting at a soft landing and disinflation occurring, but not as convincingly as before. Expectations are still for an absolute maximum of one more Fed rate hike but the time at which we start to see some potential rate cuts is being pushed further and further out. Treasury yields (market interest rates) are near multi-decade highs.

This current situation reflects; 1) why we’ve seen a recent retreat in stock prices (rising Treasury yields) but also 2) how broader fundamentals are still supportive of stocks around these levels. As such this pullback is, at least for now, still more likely to be a consolidation in a still-upward-trending market than a fully-fledged course reversal.

OTHER NEWS ..

Turkey Doesn’t F**k About With Its Crypto Fraudsters .. Disgraced ex-crypto pin-up boy Sam Bankman-Fried is just weeks away from his splashy New York trial on charges of fraud and theft related to the collapse of his crypto exchange FTX which cost clients and investors billions of dollars. It could well see him sent to prison for a pretty solid stretch. There may be a little part of him, however, that is relieved he wasn't captured in Turkey where Faruk Fatih Ozer, who ran a local exchange called Thodex until it imploded in 2021 losing crypto investors there a reported $2.1 billion, was just convicted of fraud and sentenced last week to a prison sentence of 11,196 years.

Not Too Much Of An Impact .. Student loan debt repayments resume on October 1st after a three plus-year hiatus. Despite some hysterical articles that have appeared lately, the restart of student loan payments will likely not have any substantial impact on the overall economy, just as their suspension barely moved the needle in macro terms back in 2020 (it was the stimulus package and Fed actions that did). Not to downplay the effect that this can have on many individuals and maybe even a few specific sectors as borrowers recalibrate their discretionary income, the numbers just aren’t big enough in the context of a $20 trillion economy to be anything more than a slight drag.

Estimates for average monthly payments vary, but most sources put the average monthly student loan payment between $200-$400/month. If we take a true worst-case scenario and assume that all of the 40 million existing borrowers pay the the top end of that range at $400/month (which is not even close to accurate as so many borrowers are on reduced payment plans based on profession, income, length of the loan, etc.) then the “cost” to the U.S. economy over the next year would be about $192 billion (40 million x $4,800), not even 1% of its aggregate value.

Health Insurance Costs On The Up .. Costs for employer health coverage are expected to surge around 6.5% for 2024, potentially the biggest increase in more than a decade, according to an article in the Wall Street Journal. Hospitals…

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A reasonably solid last few days of the month wasn’t enough to rescue August from being the first losing month for stocks since February, with the Large Cap S&P 500, the tech-heavy NASDAQ-100 and the Small Cap Russell 2000 losing 1.8%, 2.2% and 4.5% respectively.

We're now heading into what is often the rockiest part of the year. September is the only month to have historically seen more stock market declines than advances over the years and October has previously hosted some of the most spectacular bouts of volatility.

This particular September/October period carries its own additional risk with the quietly-growing possibility of a shutdown of the US government on September 30th as the “burn it all down” rabble in Congress seems once again determined to wreak havoc with any proposed government funding measures.

It was a data-packed week with a lot for analysts, investors and assorted nerds like me to pore over.

Q2 Gross Domestic Product (GDP, see EXPLAINER: FINANCIAL TERM OF THE WEEK below) increased at a 2.1% annualized rate last quarter according to the second of three estimates of US GDP for the April-June period. That was a revision down from the 2.4% pace reported in the initial estimate, but still a fraction higher than the final number from Q1. Meanwhile, the Atlanta Fed's GDPNow model (see GROWTH ESTIMATE FOR THE CURRENT QUARTER GDP below) is still spitting out a monster 5.6% GDP growth rate estimate for the current Q3. That's based on the July and August data that has come in so far.

The latest Job Openings and Labor Turnover Survey (JOLTS) showed that US job openings fell by more than expected to just over 8.8 million - the lowest level since 2021. This offered fresh evidence that labor demand is finally slowing down meaningfully. The quit rate fell back to its pre-pandemic level of 2.3%, so that whole Great Resignation thing is now over.

The Fed’s fave, the Core Personal Consumption Expenditures (PCE) index of inflation held steady last month. Separate data showed that consumer confidence has dropped amid souring views on jobs and higher borrowing costs.

And then we had the Big Daddy of economic data on Friday morning, the Jobs Report for August showed payrolls up by 187k, a bit above estimates of 170k but the previous two monthly increases were revised lower. However, unemployment surprisingly jumped from 3.5% to 3.8%, the highest since February 2022 and average hourly earnings have increased by 4.3% from a year ago, a touch below expectations. This was considered to be all very Goldilocks.

The conclusion drawn from all this is that the economy is undergoing a controlled cooling which was seen to further reduce (maybe even entirely snuff out) any lingering risk that the Fed will raise interest rates again at its September 19th/20th meeting with Fed Chair Jerome Powell widely expected to call a time out on the rate hike process.

Yet again, we saw a number of examples last week of a relatively orderly deterioration in economic conditions sending stocks ripping higher. However we need to remember that ongoing bad economic data is not good for markets in the medium and longer term, as stocks much prefer resilient growth and higher (but stable) market interest rates rather than collapsing growth and plummeting yields.

So far, recent declines in stocks and the uptick in volatility have been more a function of previously unrealistically optimistic expectations and not some sudden, materially negative shift in fundamentals, as that simply hasn’t happened yet. But stocks have aggressively priced in essentially no damage to the Three Pillars of the Rally (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes).

If we get a pile-on of negative news, namely disappointing growth data that raises significant hard landing worries, a rebound in inflation or Powell hinting that rates will rise further, then the Three Pillars will begin to erode and things could get ugly quite quickly with a give-back of much or even all of the entire year’s gains not out of the question.

Based on facts as they are now, there is no reason to think that a hard landing is any more likely now than it was months ago, nor that inflation is about to reverse its recent decline - but I will be keeping a cautious eye on things as the consequences of such developments would be significantly damaging to stock prices.

OTHER NEWS ..

NFTs’ Life Support Could Soon Be Switched Off .. Remember all the ridiculous ballyhoo back in 2021? Non-Fungible Tokens (NFTs) were the can’t-miss next thing, the future of art and culture. People were quitting their jobs, cleaning out their savings and retirement funds and stealing from their parents just so they could buy pictures of basketball players or penguins for insane sums of money ranging into the millions of dollars. Celebs were lining up around the block to promote such nonsense. If you didn’t own at least one, you were an idiot loser - too blind and stupid to see the glorious future of NFTs.

Well, that brave new world has now pretty much crumbled to dust. Billionaires Steve Cohen and Mark Cuban have both thrown in the towel and are shutting down the NFT marketplaces they backed, Recur and Nifty respectively, due to “unforeseen challenges” , “investment opportunities that didn’t pan out.” and other such gibberish corporate-speak excuses for having got swept up in a mania and ploughed huge sums of money into something that was always going to fail. Another leading NFT marketplace, Blur, has seen its sales volume drop by 96% and is apparently considering corporate hara-kiri as well.

The final nail in the NFT coffin could well be hammered home soon with a potential regulatory crackdown. On Monday, the US Securities and Exchange Commission (SEC) took its first enforcement action on NFTs, alleging that they are really unregistered securities and whatever piddly trading volume remains is actually illegal anyhow.

Bitcoin ETF? .. Grayscale Investments took one step forward toward launching a spot-based bitcoin (BTC) exchange traded fund (ETF) in the U.S., after judges overturned a previous ruling on Tuesday. Such an ETF would be tied to the spot bitcoin price and could potentially draw billions of dollars from everyday investors. The ruling to overturn the SEC's initial block sent bitcoin's price higher. The wait goes on, but we may be closer.

Credit Cards Might Just Become Even More Expensive To Use .. Visa (V) and Mastercard (MA) aim to generate an additional $502 million by increasing merchant fees over the coming months – with a sizable portion applied to online purchases. The extra revenue will largely come from network fees and swipe fees for transactions. Fee increases have drawn attention to the ongoing tension between credit-card networks and merchants of all sizes, who often pass additional expenses on to card-users.

UNDER THE HOOD ..

The S&P 500 index SPX closed on Friday at 4516, up nicely for the week. The next upside resistance points are to be found at 4541, 4577 and 4607. Downside support levels are at 4488, 4465 and 4450.

A little over half the stocks in the S&P 500 are above their 200-day moving averages and a little under half are below. Normally, you would consider that to be a neutral reading, but the capitalization-weighted S&P 500 (the larger the company, the higher its weight in the index) is up 19% so far this year, while the equal-weighted S&P 500 index (all 500 stocks are weighted equally at 0.2% of the index each) is only up 7%, which is a clear indication of how essential the big names (mostly the so-called “Magnificent Seven”; Apple, Microsoft, Alphabet/Google, Meta/Facebook, Amazon, Nvidia and Tesla) have been to this whole 2023 rally and how the index could fall quite sharply and quite quickly if those big names start to roll over.

Given how much they have advanced this year on the back of what is pretty much universally agreed to be overly positive sentiment, this scenario is entirely plausibl…

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There’s a very accurate saying that that you can win just about any financial argument you like by simply adjusting the start and end dates of a scenario. There’s a perfect example of this on show right now with the most important question of all to investors.

Is what we have seen over the last few weeks a temporary pullback within what is still a bull (rising) market that dates back to March of this year .. or .. is what we have seen over the last few months a temporary rally within what is still a bear (falling) market that dates back to the end of 2021?

The highly-respected and influential Charles Schwab Chief Investment Analyst, Liz Ann Sonders, climbed off the fence last week and put herself squarely in the second camp, saying that she now thinks that what we are currently witnessing is the death of the March-July rally and a reversion back to the declining trend that began in late 2021. The implication being, of course, that the S&P 500 lows of October 2022 (which are about 20% below where we are now) could well be tested again.

Terrified as I am to go up against Liz Ann who I admire immensely, I am personally still hanging on to the opposite view to her (albeit by a narrower and narrower thread); that 2023’s stock market rally is currently being interrupted rather than terminated.

On Monday, oversold stocks bounced back from a miserable couple of weeks with the most-beaten down names coming back the most vigorously. This was despite yet another day of rising market rates with 16-year interest rate highs being reached by the 10 Year Treasury Bond. By the next day, however, a “Sell The Rally” mentality seemed to have taken over with stock investors taking the opportunity of Monday’s spike to sell and lock in profits.

Tuesday’s sour tone was not helped by Standard & Poor’s ratings agency downgrading the credit ratings of several regional banking lenders including KeyCorp (KEY), Comerica (CMA), Valley National Bancorp (VLY), UMB Financial (UMBF), and Associated Banc-Corp (ASB), citing liquidity concerns.

Wednesday was dominated by giddy excitement over the upcoming after-the-close earnings release of chip maker Nvidia (NVDA) and markets shifted nicely higher again in anticipation. After the bell, we learned that the company had indeed absolutely crushed earnings and revenue expectations. It reported $13.5 billion in revenue for Q2, up an astonishing 88% from Q1. It also projected Q3 revenue to hit $16 billion. Sales were more than double those from the same quarter a year previously. All these numbers blew away analysts’ estimates.

But any broader feel-good effects from Nvidia’s outstanding results proved to be only fleeting once things opened on Thursday. The market doesn’t generally discount the same information twice (remember it was the spectacular Q1 results from Nvidia that had already driven the stock price up by nearly 50% since May) and by lunchtime, markets were down in the dumps again as concerns grew about what Chairman Jerome Powell might say (and not say) the next day at the Federal Reserve’s equivalent of its Burning Man festival in Jackson Hole, Wyoming. Wednesday’s handsome market gains were quickly extinguished by a pretty ugly Thursday decline.

Powell made his much-anticipated speech on Friday morning and it can be summed up in four words: “This ain't over yet.” He sent no explicit signals about the Fed's immediate intentions on interest rates, but his comments set the stage for the central bank to hold things steady or raise interest rates further in the months ahead, if needed - while dismissing the possibility of interest rate cuts any time soon.

Markets weren’t sure how to react at first. Stocks, bonds and the US dollar all see-sawed in the hours following the speech before finally seeming to decide that actually Powell hadn’t really said anything new and stocks shifted solidly higher in the afternoon, helped by investors finally deciding to flip the recent script and “Buy The Dip” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below). It was this that helped rescue what was a volatile, topsy-turvy five days. The S&P 500 and NASDAQ-100 both somehow ended up in the green for the week.

Bottom line, the market of 2023 in many ways resembles the current political climate in this country in that it is being defined by hyperbolic extremes. We started the year with everyone deathly afraid of a catastrophic and unavoidable recession, 1970’s style inflation and 1970’s-style interest rates. None of that happened and at some point markets decided that the Wicked Witch was dead and it was now blue skies all the way. Stocks ripped higher on a runaway train powered mostly by overly-positive sentiment (partly due to AI-mania) and extreme greed as measured by the FEAR & GREED INDEX (see below). But just because Armageddon did not come to pass when it was expected to, it is still entirely possible that:

* a significant and rather painful economic slowdown will occur,

* inflation will not magically crash to late 20-teens levels in the near future,

* the Fed may actually be telling the truth and will not suddenly set about cutting interest rates soon (which is what markets had priced in at the end of July when the S&P 500 was flirting with closing above 4,600).

The eventual truth likely lies in the middle somewhere and that’s where markets are sitting right now, as demonstrated by the day-to-day indecisive up/down/up/down/up dynamic that we saw last week. Where we go from here - and how quickly - in the coming weeks is critical to the health, or even the continued existence, of the 2023 rally.

OTHER NEWS ..

Car Trouble .. Auto-loan delinquencies are surging. Just one new car model now sells for less than $20k - down from about a dozen just five years ago. Considerably higher interest rates are only making buyers’ situations even more difficult. The average interest rate charged for a new car loan is now 9.5%, according to Cox Automotive. There aren’t many bargains on the used-car lot either, where the average vehicle lists for about $27k - up more than 30% from pre-pandemic levels. For used car loans, the average interest rate is higher, at almost 14%.

These numbers could explain why, despite a strong jobs market and robust wage growth, seasonally-adjusted rates of severe delinquency for car loans are the highest since James Blunt squealed that you’re beautiful in 2006. Clearly, an increasing number of consumers cannot afford the auto loans that they are taking on.

Airbnb Crackdown .. Thousands of New York City Airbnb listings are vanishing from the marketplace. The city is about to clamp down on all Airbnb rentals. NYC officials say that, starting on September 5th, they will be more aggressively enforcing rules on short-term rentals, including already-existing requirements that hosts must first register with the city and not rent out an entire apartment or home. Hosts are also required to be present at the property during their guests’ short-term stays. In response and in preparation for the crackdown, NYC listings are being rapidly removed from the platform.

New York’s enforcement is one of the more high-profile recent examples of cities coming down hard on short-term rentals. There were recently over 38k Airbnb listings in the city, not counting hotels that list on the platform. The annual net revenue for these listings is over $85 million. The city estimates there are about 11k illegal short-term rentals citywide.

How Much To Move? .. The lowest annual pay that would entice the average American worker to switch jobs hit a record high $78,645 in July. The so-called “national reservation wage” is up from $72,900 a year earlier, a New York Fed survey showed. And while the pay demand by women rose 11%, twice as fast as for men, they’re not asking for as much. Men want about $91k to jump jobs, while women are looking for about $25k less.

UNDER THE HOOD ..

The S&P 500 index SPX closed on Friday at 4406, up a little for the week. The next upside resistance point…

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As I’ll show in a moment, earnings and economic data last week generally propped up the case for a soft landing for the US economy and should have been celebrated, but the stock market seemed jumpy and afraid of its own shadow - seizing on anything negative it could find.

There’s a downside to the current high level of economic strength. In something of a return to the old “good news is bad news” narrative of 2021 and 2022, solid evidence of stronger growth was viewed suspiciously as possibly fueling inflation, maybe prompting the Fed to raise interest rates higher or at least hold them high for longer. These concerns are severely pushing up market interest rates (Treasury yields). This is being reflected in more new recent highs in mortgage rates (see AVERAGE 30 YEAR FIXED MORTGAGE below).

Rising yields are also a problem for stocks, because investors will be tempted to rotate out of riskier equities and into less-risky bonds because the additional expected return in stocks maybe isn’t worth the extra volatility. Rising risk-free payouts in Treasury bonds are simply getting too rich and tempting for many to resist.

Are traders rethinking the one year + inversion of the yield curve? The benchmark 10-year Treasury note interest rate is moving substantially higher and at a faster rate than the 2 year, leading to a flattening of the curve (see US TREASURY INTEREST RATE YIELD CURVE below). The 10 year closed the week at 4.26%, having earlier touched its highest level since that well known crypto shill Soulja Boy suggested that we all crank that in October, 2007.

When it comes to interest rates, it’s no longer how high that matters though, it’s how long for. The market is always looking for what’s next, for what’s over the horizon. With the Fed almost certainly done (or almost done) with rate hikes, what comes next is rate cuts and the question then becomes: when? Current consensus is that the first cut will either be at the March 2024 Fed meeting or, perhaps more likely, the May 2024 one.

The week began with a raft of negative China headlines, the Wall Street Journal even speculated that this may be “China’s Lehman moment” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below). Real estate firm Country Garden suspended trading in select offshore bonds on Monday and Zhongzhi Enterprise Group, one of the country’s biggest private wealth managers, missed payments on multiple high-yield investment products, reminding investors of the Chinese property market volatility from a few years back and reinforcing that recession risks in China could be very real. Portfolios with heavy exposure to emerging markets are already being affected.

Data last week showed that the US consumer economy and housing market are doing just fine. Americans’ spending is still outpacing inflation. Retail sales soared by 0.7% in July, a bigger burst of spending activity than economists had anticipated. The strong spending came as consumers spent more at online retailers (+2%, helped by Amazon Prime Day), restaurants (+1.4%), sporting goods stores (+1.5%) and clothing shops (+1%).

US industrial production reversed a two-month decline with a 1.0% increase in July, per a Federal Reserve survey.

There's still a nationwide shortage of homes available for sale, keeping prices elevated, but builders are ramping up activity. July Housing Starts hit 983k, 9.5% up on a year ago. New-home construction and related activities can have multiplier effects throughout the economy.

The latest estimate from the Atlanta Fed GDPNow (which I will now be tracking weekly in this report, see LATEST GROSS DOMESTIC PRODUCT (GDP) GROWTH ESTIMATE FOR THIS QUARTER below) is that Q3 GDP growth in the US will be a mind-boggling 5.8%. For context, the growth for both Q1 and Q2 was well under half that.

Minutes released last week from the last Fed meeting which unanimously agreed to resume the campaign of interest rate hikes after a one-meeting break, suggested that there may be at least one more rate hike penciled in for the cycle. Most of the participants still saw a "significant" risk of continued above-target inflation, however at least two members appeared to voice an opinion that raising rates may not have been necessary. Bullish investors would have liked the objections to have been a little more robust.

Quarterly results and guidance from Target (TGT), Walmart (WMT), Home Depot (HD), Cisco (CSCO), Applied Materials (AMAT) were all well received, while those of Agilent (A) disappointed.

Are we seeing just a consolidation in a still-upward trending market or the start of a more significant pullback? As things stand, I’m still in the camp of calling it an appropriate consolidation and pause in an uptrend, caused by the sheer speed and relentlessness of the March-July rally.

The Three Pillars of that rally that I always talk about (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes) are still in place and will likely prevent a really nasty decline from happening as long as they persist, but we need something new to push meaningfully forward and right now we just aren’t getting it.

Investors have had time on their hands to focus on things like the Chinese economy, the 10 year Treasury rate, dysfunction in Congress, inflation still being above target etc. During the rally, none of these relatively mild negatives would have been top of mind, but traders are now fixating on them because there are no big new positive catalysts. This is what is behind the difficult market conditions of the last two or three weeks.

So what are the catalysts that could lead to a resumption of the rally? ..

1. Treasury yields (market interest rates) declining modestly. We don’t want them to collapse, as that’d signal a hard landing. But a slow drift lower, especially in the 10 year, could help reverse that traffic moving from stocks to short term treasury bonds. This could come from either Fed Chair Jerome Powell confirming that the Fed is done with rate hikes, more in-line economic data and/or a continued decline in inflation readings.

2. Better than expected earnings. So far so good, earnings season has been generally positive. The biggest of them all, the Nvidia (NVDA) announcement this Wednesday, will be absolutely crucial. The company’s blow-out earnings ignited the summer rally and another strong report will help boost S&P 500 earnings expectations.

3. A change in sentiment. Negative sentiment was the unsung hero of the 2023 rally, as January’s strongly negative expectations never materialized, leaving money managers having to chase stocks higher. Now, it’s flipped, where higher stock prices are the consensus expectation. If the market continues to modestly pull back, then sentiment can become more negative and that can ironically be a springboard to the resumption of the rally.

4. Surprise good macro news. An improvement in the US/China relationship, large-scale Chinese economic stimulus, some kind of a ceasefire in the Russia/Ukraine war would all provide a surprise boost and reduce global recession chances and that would help lift stocks.

The bottom line is that the outlook for markets remains solid as long as those Three Pillars remain in place, but we need something new to kick start the rally back into gear because currently the market is just treading water and growing tired doing so. It will likely remain susceptible in the near term to any kind of unpleasant news, however modest.

OTHER NEWS ..

Just One Letter .. Single letter ticker symbols are the stock exchange’s equivalent of corporate vanity plates. They bestow a degree of Wall Street cred. AT&T has long had the ticker T, which is short for its original main product, the telephone. Citigroup (C), Ford (F),  Macy’s (M), Kellogg (K) and Visa (V) are among the other one-letter firms. US Steel, the world’s first billion dollar capitalization company, has been the proud owner of the X ticker symbol for over a hundred years. Elon Musk is weirdly obsessed wi…

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The stock market playbook is being followed exactly as we would expect and in the way that I have been banging on about in my recent weekly reports. The plain fact is that, around 4500, the S&P 500 index is priced for near-term perfection with zero room for any kind of disappointments, meaning that even the most modest of negatives (an uptick in market interest rates, some lackluster earnings, a less impressive economic report) or simply news or data that isn’t constantly positive, can cause market choppiness and sometimes significant pullbacks - not because the news is that bad in an absolute sense, but instead because there’s just no margin for error at current levels.

The strong spring/early summer rally included a very healthy dose of “chasing” and increased money flows as under-exposed traders, investors and institutions scrambled to add stock exposure in response to very negative sentiment abruptly turning positive.

That dynamic has now been exhausted and if we get more “not positive” or “we-didn’t-see-that-coming” episodes over the next few weeks, then a continued decline in the S&P 500 back towards more fundamental support (between 4,300-4,400) actually makes sense and should not be a surprise.

Positively though, as long as the “Three Pillars” of the rally remain in place (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes), then any such decline would probably not necessarily indicate that the rally was about to reverse - but could be viewed more as a temporary setback in a still positively-trending market.

The hard landing vs. soft landing question remains the most important one of all for markets over the medium- and longer-term for this simple reason; if there’s a soft landing then a further 10%-ish stock market rally is possible. If there’s a hard landing then it really doesn’t matter what the Fed does because any rate cuts will already be too late - and a market decline of 10% to 20%+ is likely.

Looking at the data as I do, the current conclusion hasn’t changed: a soft landing is still more likely than a hard landing. There are no real signs that US consumer spending is materially slowing and business spending appears to be healthy. That said, there has been a degree of additional deterioration on the employment front that we need to keep an eye on, but at this point it’s not enough to signal a shift to a hard landing narrative.

To reiterate, this does not mean a hard landing won’t happen. But so far, it isn’t happening. Growth is moderating at an acceptable pace but one that could be a cause for concern if the rate of economic contraction meaningfully accelerates.

Tesla (TSLA) shares tumbled on Monday after long-time CFO Zach Kirkhorn surprisingly quit. Declining COVID vaccine demand hit the stock prices of Moderna (MRNA) and BioNTech (BNTX).

Elsewhere there were notable upside surprises for Berkshire Hathaway (BRK.B), Eli Lilly (LLY) and Wynn Resorts (WYNN) and notable disappointments for Palantir (PLTR), Beyond Meat (BYND) and Tyson Foods (TSN).

A bit of a Q2 earnings pattern is emerging. In general, earnings beats are being rewarded less than usual and earnings misses are being punished more than usual. The reason is that so many stocks have already gone up big in that spring/early summer rally based on anticipation and reality is beginning to butt into the picture. It’s classic “Buy The Rumor, Sell The News”. As more and more earnings are released, we move from the rumor phase to the news phase.

Credit agency Moody's Investors Service downgraded the credit ratings of ten small and midsize US banks on Monday and is actively considering the possibility of downgrading some larger lenders. Financial stocks across the board initially responded by plunging in price.

Moody's cited several factors for the review, including elevated funding expenses, potential regulatory vulnerabilities and the ever-growing risks associated with commercial real estate loans due to continued diminishing demand for office space. The optimists’ view is that the Moody's call drives home the point that credit conditions are tight enough, which could well help deter the Fed from further interest rate hikes, which will ultimately benefit stock prices.

The Consumer Price Index (CPI) measure of retail inflation came out on Thursday. On an annual basis, consumer prices rose 3.2% in July, slightly up from the previous month's 3.0% gain. Gas prices have been climbing in recent weeks, which could pull the headline rate higher in the August data. 

The closely-watched Core CPI inflation figure, which excludes more volatile food and energy costs, was up 4.7% year-on-year, down a touch from June but still over double the Fed’s target. Once again, the biggest contributor to the gains was shelter costs.

CPI’s wholesale cousin, the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers rose 0.3% in July, a bit higher than expected and the largest gain since January.

Core PPI, which excludes food/energy prices and trade services rose 2.7% from a year earlier, well down from the previous month’s rate of 5.8%.

The inflation reports didn't really move the needle much at all, so stocks ultimately finished flat over the second half of the week. Until we get a number as near as dammit to the Fed's 2% target, however, inflation and its associated effect on the economy and the Fed’s propensity to play around with interest rates and thereby impact the stock market, will not go away. 

OTHER NEWS ..

Taking Credit .. Total US consumer credit card balances (SEE EXPLAINER: FINANCIAL TERM OF THE WEEK) increased by $45 billion last quarter, the most of all debt types, to surpass $1 trillion (that’s $1,000,000,000,000) for the first time ever. Delinquency rates are also on the rise and have now returned to pre-COVID stimulus levels.

We Thought We’d Seen The Last Of This .. More trouble is brewing in Congress as a small number of extremist Republicans are once again plotting to try and cause a government shutdown in advance of federal funding running out on September 30th. A few investment analysts are even putting this brinkmanship into their late-2023 outlooks with some forecasting probabilities as high as a 40% chance of a government shutdown by October and 60% by December.

While this does not risk causing a debt default like the standoff caused when the same individuals pulled this stunt earlier this year, it could still be economically damaging to the rest of us. Members of Congress opted to head off for their August vacations without being anywhere near resolving this issue, so will be under the gun again when they get back. Cue more tiresome b******t grandstanding from all sides.

Still Waiting .. The long-awaited economic recovery in China is still not materializing. July exports fell by the most since February 2020, while imports also slid by more than economists had expected. The weakness in imports undermines the hope that domestic demand will lead the bounce for China’s economy, which is taking a hit from a slump in the real estate market and softening consumption growth. The latest inflation data showed China’s consumer and producer prices moving lower for the first time since 2020. Such deflation would likely further slow an already struggling economy.

Back You Go! .. A New York judge has revoked the bail of former crypto billionaire Sam Bankman-Fried and sent him to jail at a particularly nasty federal detention facility in Brooklyn, NY after finding that “on at least two occasions” he attempted to intimidate key government witnesses in the case against him, including his on-again/off-again girlfriend and made illegal contact with some of his media buddies - all while on bail at his mom and dad’s beautiful, historic one-acre home with a pool in Palo Alto, CA.

SBF’s trial on multiple criminal counts, which could well result in decades of jail time for the disgraced founder of the crypto exchange FTX and previously a darling…

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