Last week, major U.S. stock indexes were mixed, with the S&P 500 Index and Nasdaq Composite Index recording modest gains while mid- and smaller-cap benchmarks declined. Strong results from tech-giant NVIDIA and declining oil prices supported investor sentiment, while market participants also interpreted Federal Reserve Chair Kevin Warsh’s much-anticipated speech at the annual monetary policy conference at Jackson Hole, Wyoming.
The market is getting more confident that the Federal Reserve will hike interest rates on Sept. 16, even if Federal Reserve Chairman Kevin Warsh didn’t quite say as much. The two-year Treasury yield jumped 11.8 basis points, and gold lost about 3% as Kevin Warsh put a September rate hike back on the table. Since the end of February, the 10-year U.S. Treasury yield rose from under 4% to almost 4.75% while the 30-year Treasury yield jumped from about 4.6% to approximately 5.3%.
Inflation expectations, as measured by 10-year TIPS breakevens, have risen modestly and now stand at 2.31%, compared with 2.25% at the start of the year. Despite all the discussion around inflation, a six-basis-point increase over the course of the year remains relatively small. Even so, bonds have continued to struggle as yields have risen globally. The yield on the U.S. Aggregate Bond Index is now within two basis points of a one-year high at 4.99%. While uncertainty remains elevated heading into year-end, income-oriented investors can now earn approximately 5% in high-quality bonds and 5% to 6% with a modest credit tilt.
Warsh’s policy of no forward guidance makes the crumbs he does offer even more enticing for market watchers. The odds increased to 62% the Monday following the Friday event, up from 57% on Friday, according to CME’s FedWatch tool.
Oil prices aren’t helping, rising above $90 a barrel after the U.S. attacked Iran over the weekend. The the rally could come to a halt, or worse, if rate-hike bets become a sure thing which is not our base case given the weak housing market and soft wage inflation trends. This Friday’s August jobs report takes on a greater importance. If the labor data come in strong, it’s likely to be an argument for higher rates and a weaker stock market.
Key Takeaways
1. Oil prices and long-term Treasury yields both pulled back this week. Two of last week’s biggest sources of market pressure moved in the opposite direction. Brent crude fell from the mid-$90s to ~$88 as concerns around the Strait of Hormuz eased. Treasury yields also declined, with the 30-year yield falling from about 5.27% to roughly 5.17%. The moves provided some relief after rising energy prices and borrowing costs weighed on stocks last week. Implication – The reversal eased some of the near-term pressure on inflation expectations and financial conditions, although both oil prices and long-term interest rates remain elevated.
2. Underlying private demand remained stronger than the headline GDP figure suggests. The second Q2 estimate showed the U.S. economy grew at a +1.5% annualized rate, unchanged from the initial estimate and down from +2.1% in Q1. However, real final sales to private domestic purchasers, which measure consumer spending and private fixed investment, were revised higher to +4.2% from +3.9%. The gap reflects several drags on headline GDP, including declining government spending and increased imports, that don’t necessarily indicate weak private demand. Implication – The headline growth rate understated the strength of underlying private demand, making the Q2 slowdown less broad than the +1.5% figure suggests.
3. Business investment and equipment orders remained firm in July. Durable-goods orders rose +1.1%, while orders excluding the volatile transportation category increased +0.4%. Nondefense capital-goods orders excluding aircraft, a closely watched proxy for business investment, also rose and remained near recent highs. The monthly increase was modest, but the broader trend has strengthened since the spring, extending the underlying resilience visible in Q2 GDP. Implication – Business investment continues to stand out as a relatively strong part of an otherwise uneven economic backdrop.
4. New home sales have fallen back to pre-pandemic levels as high borrowing costs weigh on demand. Sales of new single-family homes fell -10.5% in July to a 607,000 annual rate, down from 678,000 in June and -6.3% from a year earlier. The pace of sales is now roughly in line with the years immediately before the pandemic, when sales averaged around 600,000 to 680,000 annually. The supply of new homes rose to 9.6 months at the current sales pace as mortgage rates remained in the mid-6% range, keeping monthly payments elevated even as builders cut prices or offered incentives. Implication – Housing is one of the clearest areas where higher long-term interest rates are translating into weaker real economic activity.
5. Nvidia’s latest results confirmed that demand for AI infrastructure remains strong. Nvidia reported quarterly revenue of $96.2 billion, more than double a year earlier, with data-center revenue climbing to $89.0 billion. The company projected $108 billion of revenue for the current quarter even without assuming any China data-center sales. Finally, Nvidia provided its first-ever yearly outlook of roughly 70% revenue growth for the next fiscal year. The results reinforce an important distinction: investors continue to debate whether the enormous sums being spent on artificial intelligence will generate adequate returns, but demand for the infrastructure supporting that investment has shown little sign of slowing. Implication – The AI buildout continues to expand rapidly even as the market debates whether the growth will eventually justify the cost.
Weekly Commentary
AI Momentum Meets Rate Hike Risk
Stuart Katz
Executive Summary
Last week, major U.S. stock indexes were mixed, with the S&P 500 Index and Nasdaq Composite Index recording modest gains while mid- and smaller-cap benchmarks declined. Strong results from tech-giant NVIDIA and declining oil prices supported investor sentiment, while market participants also interpreted Federal Reserve Chair Kevin Warsh’s much-anticipated speech at the annual monetary policy conference at Jackson Hole, Wyoming.
The market is getting more confident that the Federal Reserve will hike interest rates on Sept. 16, even if Federal Reserve Chairman Kevin Warsh didn’t quite say as much. The two-year Treasury yield jumped 11.8 basis points, and gold lost about 3% as Kevin Warsh put a September rate hike back on the table. Since the end of February, the 10-year U.S. Treasury yield rose from under 4% to almost 4.75% while the 30-year Treasury yield jumped from about 4.6% to approximately 5.3%.
Inflation expectations, as measured by 10-year TIPS breakevens, have risen modestly and now stand at 2.31%, compared with 2.25% at the start of the year. Despite all the discussion around inflation, a six-basis-point increase over the course of the year remains relatively small. Even so, bonds have continued to struggle as yields have risen globally. The yield on the U.S. Aggregate Bond Index is now within two basis points of a one-year high at 4.99%. While uncertainty remains elevated heading into year-end, income-oriented investors can now earn approximately 5% in high-quality bonds and 5% to 6% with a modest credit tilt.
Warsh’s policy of no forward guidance makes the crumbs he does offer even more enticing for market watchers. The odds increased to 62% the Monday following the Friday event, up from 57% on Friday, according to CME’s FedWatch tool.
Oil prices aren’t helping, rising above $90 a barrel after the U.S. attacked Iran over the weekend. The the rally could come to a halt, or worse, if rate-hike bets become a sure thing which is not our base case given the weak housing market and soft wage inflation trends. This Friday’s August jobs report takes on a greater importance. If the labor data come in strong, it’s likely to be an argument for higher rates and a weaker stock market.
Key Takeaways
1. Oil prices and long-term Treasury yields both pulled back this week. Two of last week’s biggest sources of market pressure moved in the opposite direction. Brent crude fell from the mid-$90s to ~$88 as concerns around the Strait of Hormuz eased. Treasury yields also declined, with the 30-year yield falling from about 5.27% to roughly 5.17%. The moves provided some relief after rising energy prices and borrowing costs weighed on stocks last week. Implication – The reversal eased some of the near-term pressure on inflation expectations and financial conditions, although both oil prices and long-term interest rates remain elevated.
2. Underlying private demand remained stronger than the headline GDP figure suggests. The second Q2 estimate showed the U.S. economy grew at a +1.5% annualized rate, unchanged from the initial estimate and down from +2.1% in Q1. However, real final sales to private domestic purchasers, which measure consumer spending and private fixed investment, were revised higher to +4.2% from +3.9%. The gap reflects several drags on headline GDP, including declining government spending and increased imports, that don’t necessarily indicate weak private demand. Implication – The headline growth rate understated the strength of underlying private demand, making the Q2 slowdown less broad than the +1.5% figure suggests.
3. Business investment and equipment orders remained firm in July. Durable-goods orders rose +1.1%, while orders excluding the volatile transportation category increased +0.4%. Nondefense capital-goods orders excluding aircraft, a closely watched proxy for business investment, also rose and remained near recent highs. The monthly increase was modest, but the broader trend has strengthened since the spring, extending the underlying resilience visible in Q2 GDP. Implication – Business investment continues to stand out as a relatively strong part of an otherwise uneven economic backdrop.
4. New home sales have fallen back to pre-pandemic levels as high borrowing costs weigh on demand. Sales of new single-family homes fell -10.5% in July to a 607,000 annual rate, down from 678,000 in June and -6.3% from a year earlier. The pace of sales is now roughly in line with the years immediately before the pandemic, when sales averaged around 600,000 to 680,000 annually. The supply of new homes rose to 9.6 months at the current sales pace as mortgage rates remained in the mid-6% range, keeping monthly payments elevated even as builders cut prices or offered incentives. Implication – Housing is one of the clearest areas where higher long-term interest rates are translating into weaker real economic activity.
5. Nvidia’s latest results confirmed that demand for AI infrastructure remains strong. Nvidia reported quarterly revenue of $96.2 billion, more than double a year earlier, with data-center revenue climbing to $89.0 billion. The company projected $108 billion of revenue for the current quarter even without assuming any China data-center sales. Finally, Nvidia provided its first-ever yearly outlook of roughly 70% revenue growth for the next fiscal year. The results reinforce an important distinction: investors continue to debate whether the enormous sums being spent on artificial intelligence will generate adequate returns, but demand for the infrastructure supporting that investment has shown little sign of slowing. Implication – The AI buildout continues to expand rapidly even as the market debates whether the growth will eventually justify the cost.
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