Dear Friends,
The heavily awaited August inflation data was released by the U.S. Bureau of Labor Statistics on Wednesday. With an increase in the Consumer Price Index from the prior month, all eyes have now shifted to the Fed as they head into their next meeting next Wednesday. Find out more about how this economic indicator may affect the Fed’s upcoming interest rate decision in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. U.S. Inflation Accelerated in August
Consumer prices rose in August at the fastest pace in more than a year due to a jump in energy costs, illustrating the potential obstacles to wringing inflation out of the economy without a sharper slowdown. The consumer-price index, a closely watched inflation gauge, rose 0.6% in August from the prior month, the Labor Department reported Wednesday. More than half of the increase was due to higher gasoline prices. So-called core prices, which exclude volatile food and energy items, rose by a relatively mild 0.3% last month after even lower readings in June and July. The August increase reflected higher costs for items such as airfares and vehicle insurance.
The monthly core reading likely keeps Federal Reserve officials on course to hold interest rates steady at their meeting next week without resolving a bigger debate over whether they will need to raise them again this year to slow the economy and maintain recent progress on inflation. Stocks were mixed after the inflation data. The Dow Jones Industrial Average fell 70 points, or 0.2%, on Wednesday. The broader S&P 500 rose 0.1% and the tech-heavy NASDAQ Composite rose 0.3%. On an annual basis, prices overall were up 3.7% in August versus 3.2% in July. Annual core inflation edged lower to 4.3% in August from 4.7% the prior month. Core inflation has shown a more marked slowdown when considering a shorter time frame. The core CPI over the three months through August rose at a 2.4% annual rate, down from a 5% annual rate for the preceding three-month period. Fed officials raised rates most recently in July to a 22-year high, and their decision on whether to lift them higher will depend largely on whether price increases continue to slow in coming months. “I want to be very careful about saying we’ve done the job on inflation until we see” more monthly inflation readings like June and July, Fed governor Christopher Waller said last week on CNBC.
2. UAW Goes on Strike Against GM, Ford and Stellantis
The United Auto Workers union for the first time ever went on strike at all three Detroit car companies, with workers hitting the picket lines shortly after midnight Friday in targeted work stoppages at plants in Michigan, Ohio, and Missouri. UAW officials initiated the walkout after failing to clinch new labor deals with General Motors, Ford Motor, and Jeep-maker Stellantis for about 146,000 U.S. factory workers. Bargaining went late into the night, but the two sides remained too far apart to avoid a walkout at the 11:59 p.m. ET deadline. Workers at Ford’s Bronco plant in Detroit, a Stellantis Jeep factory in Toledo, Ohio, and a GM pickup plant in Missouri were instructed to leave their posts, beginning what could be a series of sporadic walkouts done without notice at additional auto factories. The three targeted assembly factories, which combined employ about 12,700 hourly workers, build some of the companies’ highly profitable and sought-after pickup trucks and SUVs.
Labor unions are exerting clout not seen in decades, winning big pay increases and better benefits in industries beset with worker shortages. Airlines, package shippers, and ports all struggled to hire desperately needed workers as the economy emerged from the pandemic and then agreed to double-digit raises with their unions this summer. UAW President Shawn Fain has described the approach as a way to sow confusion at the companies and give his negotiators more leverage at the bargaining table. He said more sites would likely go down if talks with the automakers stall. Fain said the union has never conducted strikes across all three companies in the union’s 88-year history. The UAW’s plans for targeted work stoppages would bring only a fraction of the overall workforce off assembly lines. As of Wednesday, the companies had offered wage increases of 17.5% to 20% over more than four years, short of the union’s mid-30% demand, Fain said. Other issues also remain sticking points, such as cost-of-living adjustments and retiree medical benefits.
3. China May Dodge Deflation
China’s economy appears to have survived its near miss with a damaging bout of consumer-price deflation—for now. After a grim June and July, China’s main August economic data, released Friday, contained clear hints of improvement. The news from the critical housing sector, which is mired in a protracted slump, was less encouraging: Price falls accelerated in lower-tier cities. But growth in retail sales accelerated to 4.6% from a year earlier, from just 2.5% in July. Unemployment ticked down marginally. And the past few weeks have witnessed a flurry of measures to support lending: Easier terms for second-time mortgage borrowers, and a big cut to banks’ reserve-requirement ratios on Thursday.
All of this makes a protracted fall in consumer prices—which could trap China in a 1990s Japan-like cycle of falling prices and ultra-thrifty consumers—less likely. Chinese consumers remain very cautious and still appear to be saving at much higher levels than before the pandemic. But things have clearly improved somewhat in recent weeks. Most notably, job seekers in services—the economy’s biggest sector—seem to be having better luck. The services-sector purchasing-managers employment subindex, which plummeted in line with construction employment this spring, has now begun rising again—although it remains below the 50-point mark separating expansion from contraction. Some high-frequency measures of consumer activity, including traffic congestion in major cities, also started to rebound in the late summer, according to Goldman Sachs. So, the good news is that things are looking up, on the margins. The bad news is that this is all starting from a very low base—and there are still few reasons to expect a strong growth rebound, rather than a weak muddling through. Beijing needs to do more to put a floor under the housing market. If it doesn’t, falling prices will keep weighing on households’ inclination to spend.
4. European Central Bank Raises Key Interest Rate to Record High
The European Central Bank raised interest rates by a quarter percentage point to a record high but signaled that eurozone borrowing costs may have peaked, sending the euro tumbling. In a split decision, ECB officials raised the bank’s deposit rate to 4%, the 10th increase in a row and a vertiginous rise from below zero last year. At a news conference, ECB President Christine Lagarde signaled that Thursday’s rate increase might be the last, although she didn’t rule out further hikes if economic data disappoint. ECB officials judge that rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution” to reducing inflation to their 2% target, Lagarde said, repeating language used in the bank’s policy statement.
The comment prompted investors to downgrade their expectations for future ECB rates, sending the euro down by almost a cent against the dollar to below $1.07, its lowest level since March. Bond yields slid, with yields on the benchmark 10-year government bonds of Germany, France, and Italy down between 0.05 and 0.10 percentage points. European stocks rallied, with the benchmark Stoxx Europe 600 index rising more than 1%. The eurozone still has lower interest rates than the U.S., as well as higher inflation and a struggling economy that contrasts with relatively healthy economic growth in the U.S.—all factors that are weighing on the euro. Major central banks including the Federal Reserve are signaling a possible halt to a historic series of interest-rate increases over the past 18 months aimed at tackling a surge in inflation unseen since the 1970s. Ending rate increases would favor borrowers amid uncertainty in the global economy, declining international trade, and faltering industrial output. However, signaling a peak in interest rates now risks letting excessive inflation on both sides of the Atlantic become entrenched. Some central banks, including those of Australia and Canada, signaled a pause in recent months, only to start raising rates again. Recent market movements suggest investors are now betting that rates will peak and even start falling as early as next spring as inflation and economic growth both come down.
5. Saudi Arabia, Russia Extend Voluntary Oil Cuts to Year-end
Saudi Arabia and Russia on September 5th said they would extend voluntary oil cuts to the end of the year, despite a rally in the oil market and analyst expectations of tight supply in the fourth quarter. Oil prices rose sharply following the news, with Brent rising above $90 a barrel for the first time since November, despite steady increases in Iranian and Venezuelan oil exports as the market believes the United States is not enforcing sanctions as stringently as in previous years. “The Saudis previewed such an outcome last month with their longer, deeper statement but today’s move still managed to catch many market participants by surprise. Once again proves that Prince Abdulaziz remains firmly in whatever-it-takes mode,” said RBC Capital Markets analyst Helima Croft, referring to Saudi Energy Minister Prince Abdulaziz bin Salman.
The U.S. has argued that the world needs lower prices to support economic growth and prevent Russian President Vladimir Putin from earning more revenue to fund the Ukraine war. The U.S. and Western allies have urged OPEC+ to raise output to secure lower energy costs and help the global economy. OPEC+ producers argue they are acting to maintain market stability and being preemptive. Abundant money-printing by Western central banks over the past decade is seen by OPEC+ members as having dampened the value of their main export product, which accounts for a large share of their revenues. Saudi Arabia will extend its voluntary oil output cut of 1 million barrels per day for another three months until the end of December 2023, state news agency SPA said on Tuesday, citing an energy ministry official. Russia extended its voluntary decision to reduce its oil exports by 300,000 barrels per day to the end of this year, Deputy Prime Minister Alexander Novak said in a statement on Tuesday. Both countries will review the cut decisions monthly to consider deepening cuts or raising output depending on market conditions, SPA and Novak said.
6. The Fall in Home Prices May Already Be Over
Home prices aren’t falling anymore. After declining on a year-over-year basis for five consecutive months—the longest run of declines in 11 years—U.S. home prices rose in July. The surprisingly quick recovery suggests that the residential real-estate downturn is turning out to be shorter and shallower than many housing economists expected after mortgage rates soared last year. Scarcity is a big reason. High-interest rates have prompted homeowners to stay put rather than buy new homes and take on more expensive mortgages, resulting in an unusually low inventory of homes for sale.
Many potential home buyers have given up their search because mortgage rates recently hit a two-decade high. But the homes that do list often still receive multiple bids, driving up the final sales price. The result is a market in which the overall volume of transactions has fallen dramatically. Sales of previously owned homes are now down about 36% from January 2022. But prices are generally holding firm outside of a few trouble spots. The national median existing home sale price rose 1.9% in July from a year earlier to $406,700, according to the National Association of Realtors. In August, prices in 30 of the 50 biggest markets hit record highs, according to mortgage data and technology company Black Knight. Sales could keep shrinking in the coming months as mortgage rates hover above 7%, and the housing market heads into the typically slower fall and winter. But even if that happens, prices are unlikely to fall significantly, economists say, because there still aren’t enough homes for sale to meet demand. Stubbornly high prices would likely keep home-buying affordability near its worst level in decades. The NAR housing-affordability index, which factors in family incomes, mortgage rates, and the sales price for existing single-family homes, fell to its lowest level in almost 38 years in June.
Financial Markets
1. Nasdaq Leads Broad Retreat
A slump in technology companies weighed on the broader market Friday, chipping away at major indexes’ gains, and pushing them into negative territory for the week. The S&P 500 fell 1.2%, while the Nasdaq Composite shed 1.6%. The Dow Jones Industrial Average lost 289 points, or 0.8%. The S&P 500 and Nasdaq posted slim declines for the week, while the Dow closed out the week with a small gain, up by 0.12%. Stocks opened lower and the losses accelerated at midday, with major indexes ending the day near session lows. Tech stocks, the market’s stars this year, were some of the worst performers. The S&P 500’s information technology sector lost almost 2%, dragging the broad stock market gauge into the red for the week. Front-month Brent crude settled at just below $94 a barrel, marking its highest close since Nov. 11. Treasury bonds held steady. The benchmark 10-year Treasury yield finished at 4.321%, after settling at 4.289% Thursday.
Adobe shares fell more than 4% a day after the software firm posted better-than-expected quarterly results. Shares of Arm Holdings were lower by 4.2% one day after its successful public debut. Auto stocks General Motors and Stellantis N.V. rose Friday, while Ford inched lower. Elsewhere, Lennar shares slid 2.5%. The home construction firm posted third-quarter results that beat on the top and bottom lines late Thursday.
2. Arm Shares Rise as Trading Begins in Biggest IPO of the Year
Shares of Arm surged in its highly anticipated stock-market debut Thursday, in a sign of the reviving fortunes of an IPO market that has been in the doldrums for most of the past two years. The British chip designer’s stock closed up 25% from its $51 IPO price, at $63.59. The market reaction to the biggest offering of the year will be met with a sigh of relief from investors, as well as companies waiting in the wings to go public and Wall Street firms that reap lavish fees from underwriting IPOs. Many investors are still smarting from the poor performance of the 2020 and 2021 class of IPOs, most of which remain below their debut prices. Arm’s first-day pop also bodes well for grocery-delivery company Instacart and marketing automation platform Klaviyo, which are preparing for stock offerings next week. If all three perform well, it could encourage others.
There have been other signs of life in the IPO market recently. Mediterranean restaurant chain Cava Group CAVA priced its offering in June above expectations and its stock went on to nearly double in its first day of trading. The next month, direct-to-consumer beauty company Oddity Tech priced its shares above its target range, and they rose in their market debut. Both companies’ shares have recently retreated, showing the fragility of the market. It has been a good year for chip companies, which are getting a boost from a boom in artificial intelligence built upon their products. The PHLX Semiconductor Index has risen by more than 40% this year. The value of Nvidia, which sits at the center of the frenzy, has more than tripled in value this year, surging past $1 trillion. Arm doesn’t make chips, but it supplies circuit designs that are incorporated into billions of them. The company’s circuitry is in more than 99% of smartphones, it estimates, and it is aiming to generate more revenue from those phones while growing in other sectors where it is less dominant. Those areas include the automotive and cloud-computing industries.
3. Apple Counts on Wireless Carriers to Avoid an iPhone Slump
As Apple tries to climb out from its recent sales slump, the iPhone maker will be depending on big wireless companies to give it a hand. The iPhone 15 models unveiled Tuesday offered few big hardware upgrades aside from new casings and connector ports, but they came attached to plenty of offers bundled with U.S. wireless plans. AT&T and Verizon VZ – kept offering iPhones to customers who trade in older devices and subscribe to more expensive wireless plans, a strategy similar to past iPhone releases. The deals nudge customers toward plans that pay off the handset purchase price over three years. T-Mobile offered similar deals for the new iPhone 15 models and tied the most generous discounts to its premium plans, which encourage device upgrades every one or two years. Dish Network’s new Boost Infinite service went a step further: It promised customers who sign up for a $60 monthly plan free iPhone upgrades each year.
Apple has worked closely with the wireless industry ever since AT&T won the exclusive right in the U.S. to market the first iPhone in 2007. The co-dependence between the smartphone maker and its network partners has since broadened and deepened to include aggressive trade-in deals, joint spending on advertising, and carrier marketing of add-on media services. Wireless carriers accounted for nearly four of every five U.S. iPhone sales during the June quarter, well above what Apple sold directly to customers, according to a Consumer Intelligence Research Partners survey. Their share of iPhone sales hasn’t been that high since 2016 and was well above the 48% trough hit in 2021. At the same time, the carriers rely on Apple—to help them get new subscribers and give existing ones a reason to keep their pricey service plans. Apple’s slice of all smartphone sales is also growing while other manufacturers lose ground. The iPhone hit 55% of new U.S. phone sales in the second quarter, up from as low as 28% six years earlier, according to Counterpoint Research. The carriers, which also have reported slowing revenue growth in recent years, don’t earn a profit on most of the major smartphones they sell, so they rely on people spending for top-tier service plans and accessories to boost business. But those smartphone swaps have tumbled over the past decade as American consumers opt to hold on to the same gadgets for longer stretches.
4. UPS Aims to Offset Costs from New Labor Contract
United Parcel Service is working to offset higher costs and win back lost business now that a labor contract between the package-delivery giant and union leaders has been struck, finance chief Brian Newman said in an interview. The Atlanta-based company and union leaders in July agreed to a new five-year pact that would cover about 330,000 package-delivery drivers and package sorters. The International Brotherhood of Teamsters in August ratified the contract, which granted the average full-time driver $170,000 in annual pay and benefits. UPS’s full-time drivers with at least four years at the company had been earning an average wage of about $95,000 annually, or about $145,000 including benefits.
UPS this week shared details on the extent of the costs stemming from the new agreement, saying that the contract will boost wages and benefit costs at a 3.3% compound annual growth rate for the next five years. The company said it expects to book about $500 million more in contract-related costs than it expected by year-end. That translates to a short-term hit to margins. UPS plans to generate 10% in U.S. operating margins in the first year of the contract, with the eventual goal of hitting 12%, Newman said, adding that the company will issue a three-year forecast next spring. “The reality is the new contract is actually front-loaded so that will put some pressure on margin,” Newman said. “It’s a tale of higher inflation in the first year and then modest, moderate inflation in years two, three, and four.” Uncertainty around the contract and the prospect of a strike led some customers to move away from UPS in recent months. The company last month said its revenue and net income dropped in the second quarter compared with the prior-year period, with revenue falling nearly 11% to $22.1 billion and income down 27% to $2.08 billion.
5. Microsoft, Oracle Deepen Cloud Integration
Rival tech giants Microsoft and Oracle announced Thursday a deepening of their four-year-old cloud partnership, a reflection of how new technology and customer demand have led to more cooperation in the fiercely competitive software business. Oracle will physically locate its Exadata hardware in Microsoft’s data centers, speeding up applications that customers use, the companies said. As a result, customers will have direct access to Oracle database services running on Oracle Cloud Infrastructure and deployed in Microsoft Azure data centers. Customers will be able to operate those Oracle services within Microsoft’s Azure Cloud dashboard, instead of having to run a separate Oracle dashboard. The new interoperability will make it easier for Oracle users to run Microsoft Azure’s AI on top of the Oracle database, the companies said.
The integration will simplify the purchasing process from the user perspective, the companies said, because Azure customers will be able to use Oracle services even if they don’t have a separate Oracle account. The Oracle Database Service for Microsoft Azure was announced last year but didn’t include the co-location of Oracle hardware in Azure data centers. It built on an integration introduced in 2019 known as Oracle Interconnect for Microsoft Azure, which required effort and technical expertise on the part of customers. Customer previews of the new service, Oracle Database@Azure, will be available early next year in regions of the U.S., the U.K. and Germany, with plans to expand globally, the companies said. Oracle and Microsoft declined to disclose the financial details of the plan.
Sources:
(1) www.bloomberg.com
(2) www.factset.com
(3) www.wsj.com
(4) www.nytimes.com
(5) www.barrons.com
(6) www.cnbc.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
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