Conference Season in Full Swing

1. Markets Rebound on Solid Data The S&P 500 rose 4% last week, recouping the previous week’s -4% loss, amid solid inflation data and tame initial jobless claims. The headline consumer price index (CPI) rose less than expected in August at 2.5% y/y versus expectations for 2.6% y/y. Core CPI, excluding food and energy prices, rose in line with expectations at 3.2% y/y. The producer price index (PPI) had a similar takeaway, rising 1.7% y/y with core PPI rising 2.4% y/y. Average hourly earnings continue to support a healthy consumer, beating expectations rising 0.4% m/m and 3.8% y/y. Mortgage rates are on a steady decline lower at 6.3%, well below the highs from last year around 7.9% – and the lowest levels since February 2023.

At Jackson Hole, Fed Chair Jerome Powell discussed that the committee’s priority has shifted to the labor market. He was sure to mention that the Fed does not welcome any further cooling in the labor market, and they are attentive to the risks. Initial jobless claims are the leading indicator of the labor market and remain well below recessionary levels. The current four-week moving average is pinned at 230-240K versus recessionary levels at 350-375K. Initial claims rose for much of the first half of the year but have since leveled off. The Fed, and the market, will be watching the labor market for any signs of cracks – which will be a large determinant of the speed of interest rate cuts. It is likely that this Wednesday’s Federal Open Market Committee (FOMC) meeting will begin the cutting cycle – whether it is 25 or 50 basis points, the direction is lower with easier financial conditions on the horizon.

Chart 1: Inflation, Interest Rates, and Mortgage Rates All Trend Lower^[1]

2. Excitement Returns Amid Conference Season. September brings conferences across the financial services industry, and we heard from many companies last week covering a wide range of topics. Artificial intelligence (AI) enthusiasm entered back into the market after investors began questioning the timing of return on investment across these technologies. Semiconductor names returned 9.9% in the week, with Nvidia (NVDA) and Broadcom (AVGO) up 15.8% and 21.6% respectively.

Goldman Sachs hosted its Communacopia & Technology conference with tech CEOs from across the industry presenting their ideas and thoughts on current trends in the market. Charlie Kawase, President of Semiconductor Solutions at AVGO, expects hyperscalers to keep driving its business for multiple years to come. He believes AVGOs chips, custom application-specific integrated circuits (ASICs), will contain all internal workloads in the next five years. AVGO specializes in custom ASICS and expects a continued shift to customization driven by the need for power efficiency and control over internal workloads. Amazon (AMZN) mentioned that it projects a $105 billion run rate for Amazon Web Services (AWS) and still sees acceleration in the business. AWS is investing heavily in generative AI and working to provide solutions beyond chatbots. Japan’s railway systems are implementing AWS to help predict maintenance issues weeks in advance and enhance operational efficiency and reliability. AMZN gained 8.8% last week, supported by positive tailwinds regarding AWS.

Barclays hosted its annual global financial services conference, and nearly every company had positive comments to make on the outlook of the financial industry and the state of the consumer. Morgan Stanley (MS) said dealmaking pipelines are accelerating and expects IPO and M&A markets to ramp up in 2025 and 2026. Truist Financial (TFC) said overall consumer health is strong, and FICO scores and debt-to-income levels show the consumer is in good shape. Bank of America (BAC) said deposits are stable and loan demand is ‘okay’. Consumers are stable with loan growth coming from small businesses. BAC maintains a 14% share in retail banking and said its net interest income (NII) should grow Q3 into Q4 and bring operating leverage back into the picture. American Express (AXP) CFO described the consumer as stable in a slow growth economy, and nothing has changed in terms of consumer health over the last 6-7 weeks. Overall, company commentary surrounding the American consumer remains healthy, and the resiliency of the American consumer is one of our favorite long-term themes.

3. Fixed Income. U.S. Treasury yields continued to decline throughout last week. The 2-, 10-, & 30-year yields were down 6, 5, & 5 basis points respectively. As a result, the 2s10s yield curve steepened further to 7 basis points, the steepest level since June of 2022. Municipal yields declined 2 and 3 basis points on the front and intermediate part of the curve and remained flat along the long part of the curve.

U.S. investment grade spreads tightened 2 basis points throughout the week to +135. U.S. high yield spreads remained flat at +382. U.S. Credit ratings improved as the main rating agencies issued 33 upgrades and 20 downgrades. Financials experienced the most upgrades, while industrials had the most downgrades. So far this year, the rating agencies have increased ratings 1,289 times and cut ratings 1,265 times, compared to 2023 where they increased ratings only 1,180 times compared to cutting ratings 1,780 times.

4. The Week Ahead.

Earnings – Wednesday: GIS; Thursday: DRI, FDS, FDX; Friday: LEN.

Economics –Tuesday: August Retail Sales, Capacity Utilization, Manufacturing Production, Business Inventories, NAHB Housing Market Index; Wednesday: Building Permits, Housing Completions, Housing Starts, FOMC Meeting; Thursday: Current Account, Initial Jobless Claims, Continuing Jobless Claims, Existing Home Sales.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[2]

Sources

^[1] Source: FactSet. As of September 16, 2024.

^[2] Source: Bloomberg. As of September 16, 2024.

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