Not all side-hustles are created equal. From The Wall Street Journal:

Two former New York City fire chiefs were charged Monday with accepting tens of thousands of dollars in bribes in exchange for expediting safety inspections—marking the latest corruption case to hit the administration of Mayor Eric Adams. 

The Manhattan U.S. attorney’s office alleges that Anthony Saccavino and Brian Cordasco fast-tracked required safety-plan reviews and inspections of hotels, apartment buildings and restaurants. 

A third official, Henry Santiago Jr., a retired Fire Department of New York chief who pleaded guilty and is cooperating with the government, ran an expediting business and told customers he could help fast track their projects in exchange for payment. Saccavino and Cordasco were secret partners in the expediting business as well, according to federal prosecutors. Santiago would give the defendants cash payments for their help, sometimes over steakhouse dinners or in their FDNY offices, prosecutors said.

Fifty basis points is for pikers. Rate cuts are front of mind for the political class ahead of this week’s gathering of the Federal Open Market Committee, as a trio of lawmakers penned a Monday missive urging a super-sized, three-quarter percentage point downshift to the benchmark funds rate. “If the Fed is too cautious in [easing policy], it would needlessly risk our economy heading towards a recession,” wrote Sens. Elizabeth Warren (D-MA), John Hickenlooper (D-CO) and Sheldon Whitehouse (D-RI). “The Committee must consider implementing rate cuts more aggressively upfront to mitigate potential risks to the labor market.” 

Mr. Market has likewise been expressing his preferences, as interest rate futures now price 64% odds of 50 basis point move Wednesday (with 25 basis points representing the remaining 36%) – triple the chances of that outcome discounted five days ago – while guesstimating a sub 3% funds rate by mid-2025. The policy sensitive two-year Treasury yield now sits nearly two percentage points below the funds rate’s upper bound, easily marking the largest such spread of the post-crisis era and more than double the 80-basis point discount seen as recently as early July.

That abrupt shift ripples far and wide, including in the foreign exchange realm. Thus, the Japanese yen changed hands at fewer than 140 per dollar this morning, its strongest reading in 14 months and up 13% from the multidecade lows logged in mid-July. The Bank of Japan, which pushed benchmark borrowing costs to a 16-year high of 0.25% in July following a near decade-long experiment below zero, likewise convenes on Friday, with interest rate futures pricing a near 1% overnight call rate by next June. Ebbing rate differentials from the U.S. duly pressure carry trade positions, in which investors borrow in yen terms to invest in higher-yielding assets stateside and beyond. 

“I still think that there is a lot of [carry trades] that can unwind, especially if you look at how undervalued the yen is,” Richard Kelly, head of global strategist at TD Securities, commented on CNBC last week. “That’s going to have spillover effects.” 

ING strategist Chris Turner articulated one of those potential spillovers to Barron’s on Monday: 

When forex volatility rises, it increases a metric called value at risk [which measures potential losses for a given trade]. Risk managers will then tell traders to downsize their portfolios. It’s the volatility channel that can really trigger shrinking position sizes.

Could such a dynamic manifest in a risk aversion reprise of the early August episode? Unwinding carry trades “could be a volatility factor that’s not on everybody’s radar because they think we went through this already,” added Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions. “We think investors should have some exposure to products that benefit from volatility.”

On that score, some punters expressing concern on the state of the economy are taking a flier on an even swifter rate cut cadence than is widely expected. Thus, analysts at Goldman Sachs relay that the “bond market has significantly adjusted its recession probability over the past three months,” as rate futures now price near 25% odds of the Secured Overnight Financing Rate tumbling below 2% by December 2025 from the current 5.33%. As of June, those odds stood well below 10%.   

Treasurys remained on the front foot with the long bond edging lower by four basis points to 3.94% and the two-year note marking another fresh 2024 low at 3.56%, while stocks painted a mixed picture with the S&P 500 slightly higher and the Nasdaq 100 lower by a bit less than half a percent. WTI crude continued its rebound at $70.50 an ounce, gold managed another green finish at $2,583 per ounce, bitcoin ticked below $58,000 and the VIX stayed above 17. 

- Philip Grant

Behold an instructive pair of headlines – posted within minutes of each other on Wednesday afternoon – from Reuters and Bloomberg, respectively, regarding questionable personal account transactions by Atlanta Fed president (and current FOMC voting member) Raphael Bostic: 

Atlanta Fed's Bostic violated trading rules, U.S. central bank watchdog says

Fed watchdog found no proof Bostic traded on inside information

Better safe than sorry. One of Warren Buffett’s top lieutenants cashed out in a major way on Monday, as Berkshire Hathaway vice chairman of insurance operations Ajit Jain liquidated 200 Class A shares for roughly $139 million in proceeds. That sale represented 55% of Jain’s stake in the conglomerate by CNBC’s count, the largest such decline since the 73-year-old joined Berkshire in 1986. 

“I think, at best, it is a sign that the stock is not cheap,” Bill Stone, chief investment officer at Glenview Trust Company (a BRK shareholder), told the business news channel. “At over 1.6 times book value, it is probably around Buffett’s conservative estimate of intrinsic value. I don’t expect many, if any, stock repurchases from Buffett around these levels.” 

Indeed, Jain’s employer is taking chips off the table across its own portfolio.  Berkshire Hathaway sold a combined 5.8 million shares of Bank of America over the three days through Tuesday per SEC paperwork, cashing in some $230 million to push total sales since mid-July to roughly 175 million shares and $7.2 billion (the firm still holds a near 860 million share position, equivalent to an 11.1% ownership stake). BAC shares have ranged from roughly $36 to $44 over that near-two month stretch, compared to an effective $7-and-change cost basis for warrants which accompanied Buffett’s initial $5 billion preferred stock outlay back in 2011. 

Berkshire has likewise been trimming fruit from its investment diet in 2024, pruning over 500 million shares of Apple – equivalent to more than half its holdings – between January and June.  The bulk of those sales took place during the second quarter at a Barron’s-estimated $186 per share average price, multiples of the roughly $34 a share cost basis logged between 2016 and 2018. 

That lucrative outcome duly spurs the most welcome type of financial headache: a hefty bill from Uncle Sam. New York-based tax and accounting analyst Robert Willens pegs combined state and local AAPL-related tax payments at $15 billion during the second quarter alone, telling Barron’s thus: “I guess Mr. Buffett felt that the investment case for unloading the Apple stock was so compelling that he was willing to endure the tax consequences of the sale of such highly appreciated stock.”

To be sure, planet Earth’s foremost value investor doesn’t seem to be seeing much of it these days. Berkshire’s pile of cash, near cash and Treasury bills topped $270 billion as of June 30, equivalent to 88% of the firm’s equity portfolio, and up from 40% in mid-2023. Two years ago, the ratio stood at 31%.  What to make of that high-profile retrenchment?  See “Warren Buffett’s money fund” in the brand-new issue of Grant’s Interest Rate Observer dated Sept. 13 for a closer look at today’s state of play following a stellar decade-plus run for U.S. equities. 

Green energy was abundant Thursday, as stocks staged an impressive rally with a near 1% advance on the S&P 500 to leave the broad index in shouting distance of its mid-July highs, while WTI crude snapped higher by 3% to $69 a barrel, bitcoin rose to $58,300 and gold logged a fresh peak near $2,460 an ounce. Treasurys came under some modest pressure to leave the long bond at 4% even, and the VIX settled near 17 after testing 24 less than a week ago. 

- Philip Grant

From Bloomberg:

Credit losses are rising as U.S. consumers shift spending to basic needs and away from purchases that aren’t vital, according to Citigroup, Inc. Chief Financial Officer Mark Mason.

“The nature of spend is evolving,” Mason said at a conference hosted by Barclays Plc Monday. “It’s going from discretionary to a more staple type spend.”

Net credit losses have climbed in Citi’s large cards business and payment rates have started to “come down a bit,” he said, adding that it’s within ranges previously discussed by
the firm. Meanwhile, more affluent customers are driving much of the spending growth.

Is Europe’s centrally imposed electric vehicle drive stalling out?  Stockholm-headquartered Northvolt AB announced a partial production halt at its primary manufacturing facility this morning, likewise tabling expansion plans and preparing layoffs as a series of production snags, darkening demand backdrop and persistent cash burn force Europe’s largest homegrown battery manufacturer into course correction. “We are having to take some tough actions for the purpose of securing the foundations of Northvolt’s operations to improve our financial stability,” commented CEO Peter Carlsson.  

Northvolt’s downshift comes five days after fellow Swedish concern Volvo Car ditched ambitions to feature a 100% EV vehicle lineup by the end of the decade, instead planning to offer so-called mild hybrid models with electric power supplementing an internal combination engine. "We are resolute in our belief that our future is electric," Volvo CEO Jim Rowan stated. "However, it is clear that the transition to electrification will not be linear, and customers and markets are moving at different speeds."

The current cadence is unmistakably slower. EV registrations on the Old Continent numbered 102,705 units in July per the European Automobile Manufacturer’s Association (EAMA), down 10.8% year-over-year to leave market share for that category at 12.1%, compared to 13.5% in the same period last year.  Total market share across the first seven months of 2024 stands at 12.5%, down 50 basis points on an annual basis. 

That series of setbacks for the formerly mushrooming industry is not lost on the mandate-minded political class. The Financial Times reports that European Union commissioner Thierry Breton was set to “berate” regional automakers over the sluggish pace of EV adoption during a Monday gathering, as the bloc’s Green New Deal, which includes strictures on sales of fossil fuel emitting new vehicles by 2035, makes for an uncomfortable pairing with the current backdrop. 

Indeed, one prominent industry player anticipates looming trouble from the regulators. Referencing rules capping average CO2 emissions on new vehicles at 94 grams per kilometer beginning next year from the current 116 g/km limit, Renault CEO Luca de Meo told French public radio over the weekend that automakers may be obliged to curtail production of more than two million vehicles to comply or face the prospect of billions of euros in Brussels-levied fines. 

“The speed of the electric ramp-up is half of what we would need to achieve the objective that would allow us not to pay fines,” warned de Meo, who likewise serves as president of the EAMA. “Everyone is talking about 2035. . . but we should be talking about 2025 because we are already struggling. We need to be given a little flexibility. Setting deadlines and fines without being able to make [them] more flexible is very, very dangerous.” 

Stocks caught a strong updraft with the S&P 500 gaining 1.2% to recoup a chunk of last week’s losses, while Treasurys flattened a bit in mixed action as the two-year yield rose two basis points to 3.68% and the long bond edged to 4% from 4.03% Friday. WTI crude bounced towards $69 a barrel, gold ticked higher at $2,505 an ounce, bitcoin advanced to near $57,000 and the VIX settled at 19.5, down nearly three points on the session. 

- Philip Grant

Everyone’s a critic. From the New York Post: 

An allegedly drunk plane passenger caused midair chaos and terrorized others onboard an easyJet flight, forcing the pilots to divert course and make an emergency landing. Flight U28235 took off from London Gatwick Airport in the UK just after 3:30 p.m. Tuesday heading for Kos International Airport in Greece.

The Airbus A320 flew through some turbulence during the scheduled four-hour flight, which didn’t sit well with one passenger, who had gotten intoxicated from whiskey. The allegedly drunken passenger said the captain was “rubbish” and stood up to disrupt the flight as the plane cruised at over 30,000 feet. . .

An emergency landing was made at Munich International Airport an hour and 44 minutes after takeoff, according to flight tracker FlightAware. . . As police sorted out the incident, passengers taunted the disruptive flyer by chanting lyrics from rapper KRS-One’s “Sound of da Police.”

It’s a wrapper’s delight. The bourgeoning exchange traded fund category attracted $75 billion in net assets last month in the U.S., Bloomberg-compiled data show, a five-fold increase from the same period last year. That follows a $122 billion July influx, the second-largest single month tally, and places year-to-date flows at $609 billion, which already eclipses full-year 2022 and 2023 and approaches the record $911 billion logged during the 2021 bacchanal. 

“It was an unusually eventful summer,” Bloomberg analyst Athanasios Psarofagis commented Tuesday. “You had investors piling into bonds, buying the dip in stocks, rotating into small caps – it’s a recipe for strong flows.”  

Yet those dynamics only serve to accelerate the industry’s seemingly inexorable expansion. ETFs controlled nearly one-third of total fund assets at the end of July, double that seen in 2015, while the total domestic tally of those vehicles reached 3,337 according to the Investment Company Institute, up more than 50% over the past five years and compared to just 123 in 2003.

That proliferation includes an array of increasingly complex and exotic contraptions, as illustrated by the fact that average fees on funds launched this year stand at 61 basis points, among the highest figures of the post-crisis era.  For context, the average weighted expense ratio of all U.S.-listed funds stands at about 17 basis points. 

A collection of 110 derivatives-focused ETFs tracked by Bloomberg collectively traded 29.7 million shares on average in July, up 26% year-over-year and 166% above the same month in 2022. Those funds, typically engaged in income-generating or buffer strategies (e.g., covered calls) designed to offer a measure of downside protection, saw 67% of July turnover take place on off-exchange venues such as so-called alternative trade systems (ATS), far above the 45% average for the market at large. “This suggests strong retail participation in option strategy ETFs as their order flow is typically routed to wholesale market makers off-exchange,” Bloomberg’s Jackson Gutenplan wrote yesterday. 

The growing prominence of so-called single-stock ETFs following SEC approval in 2022 likewise looms large. Witness the GraniteShares 2X Long Daily Nvidia ETF, which saw assets balloon to nearly $5 billion late last month as Jensen Huang’s outfit continued to captivate Wall Street with a mesmerizing share-price run-up. The leveraged fund, which charges a 115 basis point annual expense ratio, continues to boast nearly $4 billion in assets following NVDA’s recent 18% pullback. For context, a reciprocal vehicle attempting to generate minus 200% of daily moves in the lynchpin AI name holds less than $100 million. 

“Nvidia is the most important stock in the world right now, so therefore it stands to reason that. . . there’s going to be big demand,” GraniteShares CEO Will Rhind told CNBC last week. “That’s just the zeitgeist of 2024. But, yes, it does surprise me in terms of the strength of inflows, just from a business perspective.” 

The benefits to the average investor are less clear, particularly those unversed in leveraged ETFs’ daily rebalancing mechanism, which yields substantial performance drag over time. Thus, the London-listed GraniteShares 3X Long MicroStrategy Daily ETP, which sports a 99-basis point expense ratio, has posted year-to-date results of minus 88%, even as the Nasdaq-listed shares of Michael Saylor’s unprofitable enterprise software firm-cum-bitcoin speculation vehicle have nearly doubled since the start of 2024.

Might a more suitable option for discerning one-stop shoppers soon be in the offing?  Research Affiliates founder Rob Arnott unveiled his firm’s maiden foray into the exchange traded realm yesterday, in the form of the Deletions ETF (ticker: NIXT), which will invest in firms recently ejected from major indices in anticipation of mean reversion, a dynamic which has led to historical outperformance per the firm’s in-house research. 

“Everybody likes underdogs,” Arnott told the Financial Times. “Why not buy the rejects? Especially given historical evidence that they win by 5% per year for the next five years, at least.”  The fund will debut with a nine-basis point expense ratio during its first year of operations per regulatory filings, with annual charges subsequently rising to 39 basis points.  

Stocks were unable to hold early gains but likewise bounced off mid-day lows to leave the S&P 500 modestly weaker ahead of tomorrow’s August payrolls print, while Treasurys continued their stellar recent run with 2- and 30-year yields finishing at 3.75% and 4.02%, respectively, down one and four basis points on the day. WTI crude stayed at $69 a barrel, gold rallied to $2,516 an ounce, bitcoin slipped to $56,100 and the VIX pulled back below 20. 

- Philip Grant

Apparently, some politicians are too honest. From Scotland's Daily Record:

Health Secretary Neil Gray has been branded shameful for admitting he was trying to buy Oasis tickets during a panel discussion on Alzheimer’s disease during the Scottish National Party conference.

After an impassioned speech from Glasgow University’s Terry Quinn on how medical advances were giving new hope in the fight against dementia, Gray looked up from his phone and said: “I’m in the queue to buy Oasis tickets... on multiple devices. Hope is very important... that I get these tickets.”

Call it the American dream, reimagined: Citing estimates from JPMorgan, The Wall Street Journal relays that U.S. households have allocated 42% of their total financial assets to the stock market, the highest share on record dating to 1952. Nearly half a million 401(k) retirement accounts at Fidelity Investments were valued at $1 million or above as of June 30, a record figure and up 31% year-over-year.

Largely persistent price appreciation over the past 10 months likewise coaxes a further influx of cash into the fold. Domestic equity funds have attracted net inflows for eight straight weeks through Aug. 28, EPFR-compiled data show, maintaining that streak during last month’s brief but violent post-BoJ rate hike convulsions. Small-cap funds gathered $12.7 billion of assets on balance in July, the best monthly showing for that economically sensitive cohort on record. “This melt up is exactly what any investor should be waiting for,” Springfield, N.J.-based dentist William Bohrod told the WSJ. “The most conservative approach is ‘all in, all the time.’”

More broadly, the stellar returns seen in the post-2008 epoch leave Uncle Sam in rarified air.  Verdad Capital partner Brian Chingono points out in Tuesday commentary that U.S. stocks have generated 13.4% annualized returns over the past 15 years, more than double the 5.9% per-annum returns for other developed market equities. 

As a result, the U.S. now accounts for nearly 70% of developed market allocations as measured by the market capitalization-weighted MSCI All Country World Index. For context, American firms generated 55% of aggregate net income across the developed market realm over the 12 months through July, with investor expectation of outsized future growth helping explain the valuation premium.

“While the U.S. market has dominated over the past decade [plus], an encore may not follow,” Chingono cautions. “Growth narratives that previously seemed inevitable can quickly change when faced with reality.”   

Witness the evaporating growth narrative surrounding electric vehicles, illustrated by S&P Global slashing its full-year production growth forecast for the category to 14% last month from a 38% bogey issued 12 months prior. That rapid downshift has caught Tesla investors off guard, spurring a 15% year-to-date decline and arguably thinning the so-called Magnificent Seven’s ranks by one. Accordingly, Chingono raises the possibility of a reprise within a driving force of the recent bull run: “We believe a similar reality check could occur with current expectations for artificial intelligence.” 

On that score, a potential inflection point looms next Monday, in the form of Apple’s scheduled launch event for the iPhone 16. Thanks in large part to percolating anticipation of embedded AI capabilities in its next generation device, Apple shares have jumped 35% from their mid-April lows, accounting for nearly one-quarter of the Nasdaq 100’s total return over that stretch and leaving the firm valued at 31 times forward earnings, a 50% premium to its 10-year average valuation.  Yet as Bloomberg documents today, previous iPhone launch dates have often disappointed the well-represented bull crowd, with AAPL shares dropping on 12 of the 17 prior occasions. 

Mr. Market offered shareholders a rude greeting following the long weekend, as the S&P 500 and Nasdaq 100 lost 2% and 3% respectively in the worst one-day showing since the Aug. 5 mini-meltdown, though bonds were little troubled with Treasury yields lower by three to seven basis points across the curve and the iShares iBoxx $ High Yield Corporate Bond ETF losing less than half a percent. WTI crude was hit by 4% to $70 a barrel, gold settled modestly lower at $2,492 per ounce, bitcoin settled near $58,200 and the VIX jumped to near 21, up more than five points on the session. 

- Philip Grant

Your headline of the day, from Bloomberg Businessweek:

Private Equity Sets Sights on $30 Billion Youth Sports Industry

Thus paving the way for a cake and ice cream buy-and-build. 

Nothing stops this train: Thursday’s round of sturdy economic data – featuring an upwardly revised 3% second quarter GDP print (20 basis points north of the prior iteration) and 0.8% sequential rise in July retail inventories, alongside a modest downshift in initial weekly jobless claims which leaves that labor market indicator at a 231,500 four-week moving average, its lowest since early June – make no dent in investor assessment of easier money ahead. 

Thus, interest rate futures continue to point to 101 basis points of rate cuts to the 5.25% to 5.5% Fed funds rate by year end, while pricing benchmark borrowing costs below 3.5% by August 2025. Meanwhile, the policy-sensitive two-year Treasury yield has dropped more than one percentage point since June 10, settling Thursday at 3.83%, 164 basis points below the upper end of the overnight rate.  That’s the largest such discount of the post-2008 era and compares to sub-100 basis point nadirs in both early 2019 and spring 2020, as the Fed teed up easing cycles from the respective 2.25% to 2.5% and 1.25% to 1.5% ranges. 

That course correction loudly reverberates across the credit complex. As Bloomberg’s James Crombie pointed out last week, just 40% of investment-grade index components now yield at least 5%, down from 90% at this time last year.  The share of junk bonds with a 7% plus yield has likewise shrunk to 30% of constituents from 75% 12 months prior.  

Mr. Market’s aggressive response to today’s mostly sanguine picture leaves some observers scratching their heads. “We have many indicators showing that the economy is not falling into recession,” Guillaume Rigeade, co-head of fixed income at Carmignac, told Reuters this morning. “It’s not justified to us, this acceleration to a cutting cycle so quick.”  

November’s presidential election, with budgetary restraint not exactly underpinning either candidate’s agenda, likewise looms large. “Whatever the outcome may be, it will result in still-high fiscal spending and large. . . supply of U.S. Treasurys,” added Capital Group investment director Flavio Carpenzano. 

Yet in any event, Fed chair Jerome Powell’s expressed concerns over the health of the labor market at last week’s Jackson Hole conclave rule the day, underscored by a recent triggering of the Sahm rule recession indicator, i.e., a 0.5% increase in the three-month rolling average unemployment rate compared with its prior 12-month low. 

To that end, Bloomberg highlights visible employment strains at a quintet of regional Federal Reserve bank surveys in August, with full-time payrolls in the Philadelphia region shrinking by the most in more than four years, alongside consecutive months of contracting employment in the Kansas City and Richmond districts, stagnation in the Dallas metro area and the first sequential downshift in New York area employees since the start of 2024. 

“There is an elevated risk that weak labor demand pushed the U.S. economy towards recession, an outcome that would produce a cumulative Fed rate cut of at least 300 basis points,” analysts at JPMorgan wrote on Tuesday. “At the same time, a growth boost from an early dose of easing to offset risks that didn’t materialize could combine with positive supply side outcomes to generate reaccelerating labor demand next year.” 

How to position one’s portfolio for today’s particularly muddled backdrop?  See the analysis “The grand hotel of Treasury bills” in the July 5 edition of Grant’s Interest Rate Observer for the bull case on Uncle Sam’s short-term obligations even in the face of E-Z(er) money ahead, along with “When 5% goes poof” in the brand-new issue dated Aug. 30 for a look at a smorgasbord of income-generating securities potentially well-suited for a lower rate regime.  

A flat finish belied wild trading action that featured the averages erasing overnight losses and pushing higher by nearly 2% on the Nasdaq 100 before completing the round-trip by day’s end, while Nvidia logged a 6.4% post-earnings pullback, settling near its lowest levels of the session. Treasurys came under modest pressure as 2- and 30-year yields rose to 3.87% and 4.15%, respectively, up four and two basis points on the day, while WTI crude rebounded towards $76 a barrel and gold rose to $2,521 per ounce. Bitcoin finished slightly higher at $59,500 and the VIX retreated below 16, down a point and change. 

- Philip Grant

Everyone to the service line:  As the U.S. Open begins this week in Flushing Meadows, thirsty tennis enthusiasts shell out a pretty penny for boozy refreshment. 

As Sportico data reporter Lev Akabas relays today, the Honey Deuce house cocktail sells for $23 a pop this year, up from $14 in 2012.  That 64% price increase nearly doubles the 37% cumulative CPI advance over the dozen years through July. 

From Bloomberg:

Mortgages locked in at low costs provided U.S. consumers with an extra $600 billion in spending cash since 2022, blunting the impact of the Federal Reserve’s interest-rate hikes, according to analysis by the Swiss Re Institute.

The boost received by homeowners with fixed-rate mortgages amounted to almost 2% of all personal consumption spending, wrote economists Mahir Rasheed and James Finucane at the insurance firm’s research arm. 

The effect has been to mute the impact of monetary policy transmission, as consumer demand proved resilient to Fed hikes. The same mechanism will likely counteract the effectiveness of rate cuts that the Fed is now planning and make it harder to stimulate consumer demand if the economy slows.

These chips are no mere side dish: A seminal financial event of summer looms dead ahead, with Nvidia’s fiscal second quarter earnings release set for Wednesday afternoon. The artificial intelligence behemoth will post $28.7 billion in revenue, up 112% from the same period last year, if sell-side consensus is on point, with adjusted gross margins pegged at a cool 75.8%.  

Though striking in their own right, those figures represent sequential downshifts from the 262% year-over-year revenue growth rate and 78.4% gross margins generated over the three months through April.  Wall Street consensus likewise calls for $31.69 billion in fiscal third quarter sales, which would represent a 75% uptick from the August through October period in 2023. 

“We’re reaching the law of large numbers here,” Michael Schulman, chief investment officer at Running Point Capital, told Reuters. “Once a company gets to a certain size, it just physically can’t keep up the same growth.”  Sitting on snazzy 156% year-to-date gains following last year’s 230% advance, NVDA shares settled Friday less than 5% from their mid-June high-water mark, virtually erasing a drawdown that briefly topped 30% on an intraday basis on Aug. 5. 

Those outsize moves carry no small implication for the market at large. As Bloomberg’s Cameron Crise finds today, Nvidia’s own impact on weekly S&P 500 returns (calculated by multiplying price gyrations with index weight on a rolling five-day basis) reached 116 basis points last week, “substantially larger than its downside contribution” during the brief-but-violent early August downdraft and topped only by Apple during the summer of 2020 for the largest individual contributor to market performance since the turn of the century.  For context, dot.com bubble darling Cisco rarely moved the broad average by more than 50 basis points per week during its late 1990s heyday.  

Further underscoring that dynamic, Jensen Huang’s outfit added $329 billion in market cap during a 13% rally on July 31, easily establishing the largest one-day dollar valuation swing. Prior to this year, Apple held that distinction with a $191 billion, one-session move. 

Considering Nvidia’s outsized influence, any downshift could duly augur un-bullish tidings. As the Financial Times documented earlier this month, Elliott Management laid out the bear case in an investor communique, expressing skepticism that fellow technology behemoths will continue purchasing the firm’s graphic processing units at the breakneck current pace and contending that artificial intelligence itself is “overhyped with many applications not ready for prime time.”  Of the nascent technology, Elliott added that “there are few real uses,” as AI software has yet to unlock “value commensurate with the hype.” 

Place your bets. 

Stocks turned lower following Friday’s Jackson Hole jubilee, with the S&P 500 losing 0.25% and the Nasdaq 100 logging a 1% decline, while Treasurys were unable to maintain their early momentum 2- and 30-year yields each finished higher by one basis point at 3.91% and 4.11%, respectively.  WTI crude jumped above $77 a barrel, gold consolidated Friday’s gains at $2,518 per ounce, bitcoin pulled back to $63,000 and the VIX settled slightly north of 16., 

- Philip Grant

Your headline of the day, from CNBC:

Taylor Swift London Eras Tour unlikely to move the needle on the Bank of England’s rate policy, analyst says

It remains to be seen whether next month’s scheduled performances from the Jonas Brothers at London’s O2 arena will impact the BoE’s quantitative tightening. 

The fixed is in: friendly financial conditions predominate across the corporate credit complex, as bulled-up investors open the door to a freewheeling financing backdrop. 

A relentless recent rally in the junk realm represents exhibit A, as Bloomberg’s U.S. Corporate High Yield Index enjoyed its 11th straight green finish Tuesday, its longest winning streak since September 2021, to leave benchmark yields at a two-year low of 7.42%.   

With a September reduction in the 5.25% to 5.5% Fed funds rate looking increasingly like a done deal, high-grade corporates are similarly on the march.  Bloomberg’s investment-grade gauge settled Tuesday at an 18-month low yield-to-worst of 4.92%, down 152 basis points from its October 2023 peak and well below the 5.55% seen as recently as early July.  

As Bloomberg’s Jamies Crombie noted Monday, that relentless rally leaves relatively slim pickings for income-seeking investors, with a mere 40% of investment-grade index components now sporting yields of 5% or above, down from 90% at this time last year.  In the junk category, just over 30% of constituents yield 7% or above, down from 75% in August 2023. 

The red-hot backdrop has duly coaxed issuers and investors alike to the primary market, dwindling compensation and all. Subinvestment-grade supply for the month reached $18.05 billion as of yesterday, already topping last August’s 31-day output by 71%.   

It’s a similar story up the ratings ladder, as high-grade supply reached nearly $20 billion on Monday and Tuesday, burnished by a jumbo $10.5 billion sale from supermarket chain Kroger to fund its buyout of rival Albertson’s.  For context, the third week of August last year logged only $3.45 billion of issuance. Month-to-date supply now stands at $102 billion, topping dealer expectations of $95 billion for August as a whole and blowing past the $65 billion seen across August 2023.

Savvy operators in the floating-rate realm have duly capitalized on the blue-sky backdrop to ring the register. As PitchBook LCD relayed last week, private equity sponsors issued $43.2 billion of leveraged loans from Jan. 1 to Aug. 12 to fund so-called dividend recapitalizations, trailing only the $48.4 billion logged in 2021 for the most prolific (or is that profligate?) year-to-date figure on record. LCD likewise notes that this year’s output would have been higher still without the early August volatility spasm, which served to thwart a planned $5.28 billion recap deal from Focus Financial Partners.  Average institutional spreads for this year’s vintage registered at 377 basis points, the narrowest pickup versus SOFR since at least 2010.

Yet deal-hungry stateside lenders have their limits. Bloomberg reported Monday that domestic issuance of environmental, social and governance themed corporate debt reached a mere $18.2 billion this year through Aug. 16, the slowest pace since prior to the pandemic and a fraction of the $94.5 billion logged across 2021 when the ESG craze reached a fever pitch. 

The screens are green, at least.

Stocks forged ahead following yesterday's shallow pullback, with the S&P 500 advancing one-third of a percent to settle within hailing distance of its high-water mark, while dovish Fed minutes from the July meeting helped power two-year Treasury yields to 3.92%, the second-straight seven basis point decline. WTI crude remained in the pain chamber, slipping below $72 a barrel for the first time since January, gold finished little changed at $2,511 per ounce, bitcoin rallied 4% to $61,300 and the VIX rose back above 16. 

- Philip Grant

From the Australian Financial Review:

Reserve Bank of Australia governor Michele Bullock has softened the bank’s previous warning that government spending is contributing to inflation and instead pointed to consumer spending, in a messaging shift that will help shore up relations with Treasurer Jim Chalmers.

Ms. Bullock reiterated on Friday that it was “premature” to be thinking about cutting the RBA’s 4.35% cash rate this year but went out of her way to absolve the Albanese [Labor] government of responsibility for persistent inflation. . . 

The independent central bank’s statement of monetary policy last week forecast public sector demand to rise by 4.3% through the year to December, up from a previously assumed 1.5%, following a sharp increase in spending in the federal and state government budgets in May and June.

Partly as a result, the RBA noted that inflation was expected to take six months longer – until late 2026 – to fall to about the midpoint of its 2% to 3% target range.

Can’t we all just get along?  A new day of Sino-American collaboration is at hand, as the U.S.-China Financial Working Group hammered out cooperation agreements late last week pertaining to systemically important banks, cross-border payments and monetary policy, among other topics.  

Conversations were “professional, pragmatic, candid and constructive” according to a summary from the People’s Bank of China, allowing “the financial management departments of both sides to maintain timely and smooth communication channels and reduce uncertainty [during] financial stress events.”

Renewed efforts by the Middle Kingdom to attract foreign capital colors that regulatory alliance, as state media revealed Friday that Beijing will permit unfettered overseas investment in its lynchpin manufacturing realm, while likewise relaxing strictures across other politically sensitive sectors.  That bulletin comes two days after a Ministry of Commerce convened-powwow with representatives from 20 foreign firms including Siemens, SAP, Lego and Medtronic to streamline planned projects within the world’s second-largest economy, with the South China Morning Post reporting that the government invited those companies to get started “at their earliest convenience.”

Informing that conciliatory stance: inbound foreign direct investment summed to RMB 539.47 billion ($75.2 billion) over the first six months of the year, state compiled data show, down 29.6% from the same period a year ago.  Similarly, China’s direct investment liabilities in its balance of payments – a measure of foreign direct investment which includes retained earnings – tumbled by nearly $15 billion during the second quarter according to the State Administration of Foreign Exchange (SAFE) following a $5 billion decline from January to March, putting that metric on pace for its first ever annual decline in a data series stretching to 1990. 

At the same time, outbound investment reached a record $71 billion over the three months through June, representing a near 80% jump from the $39 billion logged in the second quarter of 2023. In response to “surging appetite” for overseas securities, Reuters relays that banks and asset managers are “scrambling” to bypass state-mandated quotas, reflecting the “latest sign of investors’ lack of confidence in local assets.” 

Indeed, international investors have pulled a net $12 billion from mainland equities since the start of June according to data from the Hong Kong stock exchange, leaving that metric in a net outflow since the start of 2024.  That has never happened over a full year period since China introduced the Stock Connect trading link, which allows foreign investors to access the market, in 2014.

By way of response, local authorities likewise turn to a well-worn playbook. As the Financial Times reports today, daily data showing foreign investment flows on the Stock Connect are no longer available for viewing, with that information now restricted to quarterly updates. 

To little surprise, that decision did not garner universal applause. “While the data provided by global exchanges often vary, the lower transparency will not help attract foreign investment, especially in an emerging market,” Gary Ng, senior economist at Natixis, told the pink paper. “Investors may wonder why it is no longer offered and find it more challenging to justify entry into China.” 

Stocks raced higher by 1% on the S&P 500 to pull the broad index within 1% of its mid-July peak following its eighth straight green finish.  Long-dated Treasurys likewise enjoyed a green finish as 10- and 30-year yields settled at 3.86% and 4.11%, respectively, down three and four basis points on the session, while the two-year note held steady at 4.06%. WTI crude pulled back below $74 a barrel, gold consolidated recent gains at just over $2,500 per ounce, bitcoin bounced a bit at $59,200 and the VIX continued its retrenchment from its early August spasm, settling south of 15. 

- Philip Grant