Andranik Hakobyan
Listen below or on the go on Apple Podcasts and Spotify
This is an abridged transcript of the podcast.
Our top story so far –
The parade of soft economic data continues, giving the market more confidence that the Fed has already reached the terminal rate.
Second-quarter GDP was revised lower, down to 2.1% from the initial estimate of 2.4%. Economists were expecting no change. That brings the Q2 rate of expansion to about the 2% pace clocked in Q1 2023.
The downward revision primarily reflects lower estimates on business spending, partly offset by an upward revision to state and local government spending.
The Fed’s favorite inflation gauge, the core PCE price index, was revised down to +3.7% from +3.8%.
Both added to the dovish sentiment sparked yesterday by a drop in job openings and consumer confidence.
Fed funds futures continue to shift away from hawkish expectations after Jay Powell’s Jackson Hole speech. They now price in a 60% chance of no hike in November and a greater chance that cuts begin in May, pulled forward from June.
Wells Fargo’s economics team says they “continue to anticipate the economy will moderate over the second half of the year under the weight of tighter policy, which should weigh further on firms’ profitability and thus their ability to invest and hire.”
They add that they still see a recession early next year as more likely than not.
In addition, ADP reported that August private payrolls rose by 177K, below the forecast of 195K.
Pantheon Macro says that’s in line with trends, but ADP isn’t a reliable indicator.
The bad-news-is-good-news trade kicked in but on a much smaller scale than the big moves on Tuesday.
The S&P 500 (SP500), Nasdaq (COMP.IND), and Dow (DJI) are up less than +0.5%.
Rates slipped. The 10-year Treasury yield (US10Y) fell below 4.1%, and the 2-year (US2Y) fell to 4.85%.
WTI crude (CL1:COM) and gold (XAUUSD:CUR) are higher.
Among active stocks –
Macquarie downgraded Peloton (PTON) to Neutral from Outperform, the latest bull to run to the sidelines. Analyst Paul Golding says while “a turnaround could still happen, the continued volatility has made it too difficult to project.” Shares risk dipping below $5 on any negative surprise just as much as they could pop if demand resurges over the holidays.
Bernstein cut Texas Instruments (TXN) on concerns about revenue and gross margins. Analyst Stacy Rasgon downgraded shares to Underperform from Market Perform but kept his $145 price target, noting that it looks as if Wall Street estimates are too high with the company “structurally” raising spending to build out revenue growth.
Brookfield Real Assets Income Fund (RA) tumbled after the closed-end fixed-income mutual fund said on Tuesday it plans to reduce its monthly distribution by about 41%.
In other news of note –
The TSA expects to screen more than 14 million passengers during the extended Labor Day holiday weekend from September 1 through September 6. The busiest day is projected to be September 1, when TSA expects to screen over 2.7 million travelers passing through security checkpoints.
Average ATM fees for out-of-network withdrawals have reached a record high this year, surpassing the previous record reached in 2019, according to a recent Bankrate study. The total cost, including the fees charged by the accountholder’s own bank and the surcharge from the ATM owner, was $4.73, edging out 2019’s $4.72.
By contrast, overdraft fees and non-sufficient funds fees dropped dramatically as banks were pressured by regulators and competition.
And an appropriate story for Wall Street Lunch: Restaurant Brands International’s (QSR) Burger King will have to go to trial after a federal judge in the Southern District of Florida rejected a motion to dismiss a class action lawsuit. The suit alleges Whoppers appear larger on menu boards than their actual size. The judge ruled diners could have reasonably relied on the depictions made on the menu boards.
The plaintiffs alleged that the Whopper’s depiction on in-store menu boards made the Whopper look 35% larger and have ingredients that overflow over the bun. Burger King has denied any wrongdoing and maintained that its advertising is accurate. The company has also argued in the case that it was not required to deliver burgers that look exactly like the pictures on menu boards.
In the Wall Street Research Corner –
The S&P has cleared an important technical level with its recent gains. The close above 4,460 clears a “well-defined” level bulls needed to regain the upper hand, according to BTIG.
The benchmark index may have avoided a head-and-shoulders pattern, which needed “confirmation by closing below the neckline (4330–4350).”
BTIG said that confirmation could have led to a woosh down to 4,100.
And while yesterday’s headline JOLTS number took all the headlines (not surprisingly), investors should look to the quits rate for a better gauge of the economy, according to Roth MKM.
The rate of those voluntarily leaving their positions fell to 2.3%.
Strategist Michael Dard says the quits rate is now near levels seen at previous business cycle peaks.
“The quits rate tends to be a forward-looking measure of labor market pressures and tends to lead wage and salary growth,” he said. “It also has a very tight correlation to the real risk-free interest rate.”
“The current level of the quits rate suggests the upward pressure on risk-free real rates is now behind us.”
