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The US had an exceptionally good inflation report. Now what?

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The US had an exceptionally good inflation report. Now what?

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Good morning. Yesterday, Unhedged wrote about Nvidia scepticism. Its shares promptly fell 5.6 per cent. Coincidence? Oh, absolutely. For the real reason the shares fell, read on.

I will be on holiday next week, and Unhedged will appear only on Wednesday, Thursday and Friday, written by my brilliant colleagues. Email me anytime: robert.armstrong@ft.com.

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Inflation

We’re there. But will we stay?

Inflation — at least the way Unhedged likes to measure it — was not just cool but downright cold in June. Below is the growth in the core CPI index, on a monthly basis, annualised. June was below 1 per cent, and the three-month average is only a hair above 2 per cent. Huzzah!

The most important subplot in this uplifting story is housing inflation, which had been the most recalcitrant bit of the price index. It plummeted in June, finally confirming the message that more timely private measures have been sending for a long while.

Line chart of CPI shelter inflation, month-over-month % change, annualised  showing This is good, II

It is not quite time for the Federal Reserve chair to string up the “Mission Accomplished” banner across the bridge of the central bank’s aircraft carrier, however. One month is not enough. High inflation comes in waves historically and the monetary policy committee will, rightly, demand confirmation before changing monetary policy. And this month was probably exceptionally good. Preston Caldwell of Morningstar points out that three biggish volatile categories — airfares, hotel rates and used cars — fell sharply in unison. If they had been flat, the month-over-month reading would have looked a lot like May’s. That said, they weren’t flat, and May’s reading was very good, too.

In response, the futures market pushed the implied probability of a rate cut in September to 91 per cent, from 55 per cent at the start of July. Both short- and long-term Treasuries rallied, and the yield curve steepened slightly. But the really interesting response was in the stock market. Nvidia fell nearly 6 per cent and other chipmakers followed. Alphabet, Meta, Microsoft, Apple and Amazon all fell by 2 per cent or more. Small-cap indices popped. A flight to risk, surely. But rate sensitivities are a crucial part of that. Here is a look at the performance of the S&P 500 sectors yesterday:

Bar chart of S&P 500 sector % price return showing Cyclicals up, tech down

The top performer, real estate, is a debt-dependent industry that has been crushed by high rates. Utilities are bond substitutes and therefore rate sensitive. The sigh of relief from both is predictable. The next three, materials, industrials and energy are capital intensive and cyclical. The three bottom performers, by contrast, have heavy exposure to the magnificent seven, where, as it turns out, some investors have been looking for a reason to take profits.

It is just one day, but this has the makings of a rotation in market leadership. The moves make me think that a significant part of the tech/AI rally has been driven by fear, not exuberance. Investors are looking for somewhere to hide from the inevitable, if delayed, damage done by high interest rates.

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That damage, or rather avoiding it, will be on the minds of Powell and his colleagues as they decide when to cut rates. The only parts of the economy to feel real pain to date are real estate, housing, construction and the most indebted consumers. But more pain may follow in the months to come; the yield curve remains very much inverted. The decisive signal will be the labour market. So now a familiar question takes on renewed relevance. Is the slowdown in the labour market post-pandemic normalisation, or the start of something more worrisome?

This debate will be fought between those who focus on levels and those who focus on the direction of change. The unemployment rate has risen from 3.7 per cent to 4.1 per cent since January, driven entirely by more people entering the workforce and seeking jobs. That’s a notable increase. But 4.1 is still a low level by historical standards. Similarly, job growth, wage growth and hires cool with almost every passing month, but are still fine by pre-pandemic standards. I would tend not to worry much about any of this, were it not for the inverted curve and softness in the employment sections of both the services and manufacturing ISM surveys.

It is a tough set of data to read in the shadow of the pandemic. But there is enough there to get the Fed thinking about the employment side of its mandate. The market looks about right on that September cut.

One good read

Aristotle in the office.

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It Could Take Weeks Before Displaced L.A. Residents Can Go Home

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It Could Take Weeks Before Displaced L.A. Residents Can Go Home

The tens of thousands of people displaced by the devastating wildfires in the Los Angeles area are increasingly anxious to know when they can return home — or to what remains of their properties.

Officials say crews are working to reopen closed areas, snuffing out hot spots and clearing hazardous debris, but no timeline has been announced for lifting the evacuation orders.

Experts have warned that it could take weeks before people can return to the hardest-hit neighborhoods because of the amount of work needed to ensure the safety of residents.

Firefighters are still trying to contain the Palisades and Eaton fires, the biggest ones in the Los Angeles region, a prerequisite to allowing people to return. Both remained largely out of control on Wednesday evening, though their growth had slowed.

Captain Erik Scott of the Los Angeles Fire Department said the timeline for people returning to their neighborhoods can vary. It depends on the extent of the damage, which needs to be mapped and carefully assessed in every impacted community, he added. There is also the threat of hazardous materials, such as asbestos and chemicals.

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“We want people to have realistic expectations,” Mr. Scott said.

It took weeks in the aftermath of some previous destructive blazes for people to return. In 2018, the Camp fire destroyed most of Paradise in Northern California and killed 85 people. The final evacuation orders in that town were lifted more than a month after the fire started.

Similarly, after a devastating fire in Lahaina on the island of Maui killed more than 100 people in 2023, it was nearly two months before the first of the thousands of displaced residents could return to their properties.

The suppression of the fire is only one step in the process, according to fire officials. There are yet more safety and infrastructure issues to tackle. Workers need to clear and replace downed power lines, stabilize partially collapsed buildings and remove toxic ash from the ground.

“That’s why the orders are still in place,” said David Acuna, a battalion chief with Cal Fire. “It’s not just about the fire. There are all these other elements to address.”

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The grim search for human remains has further complicated efforts to clear neighborhoods. Officials are using cadaver dogs to comb through the thousands of structures damaged or destroyed in the fires to locate remains.

“We have people literally looking for the remains of your neighbors,” Sheriff Robert Luna of Los Angeles County said at a news conference on Monday. “Please be patient with us.”

Even for those whose homes survive, the lifting of evacuation orders does not necessarily mean they can return to live in them right away, warned Michael Wara, a climate policy expert at Stanford University.

“There’s going to be smoke damage,” he said. “There’s going to be the fact that you don’t have utilities.”

In Pacific Palisades, the recovery process was underway in its incinerated downtown. The air buzzed with the sound of jackhammers, bulldozers and tree shredders. Workers cleared debris, pulled down charred utility poles and ground up the skeletal limbs of burned eucalyptus trees.

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Ali Sharifi managed to inspect his lower Palisades home on Tuesday. Aside from a burned backyard fence, it was intact. Yet the destruction around it, including charred schools, churches and grocery stores, gave him second thoughts about returning.

“Who wants to live in a ghost town?” Mr. Sharifi said.

Erica Fischer, an associate professor at Oregon State University who studied the aftermath of the Camp fire, said that a fast recovery is not always a good one, especially if it means rebuilding in ways that contributed to the disaster.

Of the ongoing evacuation orders in California, she said, “I know it’s not convenient, and it’s disruptive, but it keeps people out of harm’s way.”

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Joe Biden says ‘oligarchy’ emerging in US in final White House address

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Joe Biden says ‘oligarchy’ emerging in US in final White House address

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US President Joe Biden has warned that an “oligarchy is taking shape in America” that risks damaging democracy, as he blasted an emerging “tech industrial complex” for delivering a dangerous concentration of wealth and power in the country.

Biden’s comments during a farewell address to Americans from the Oval Office on Wednesday night amount to a veiled attack on Donald Trump’s closest allies in corporate America, including tech billionaire Elon Musk, just five days before he transfers power to the Republican.

Biden said he wanted to warn the country of the “dangerous concentration of power in the hands of a very few ultra-wealthy people” and the danger that their “abuse of power is left unchecked”.

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He cited late president Dwight Eisenhower’s warning in his 1961 farewell address of a military-industrial complex and said the interaction between government and technology risked being similarly pernicious.

“I’m equally concerned about the potential rise of a tech-industrial complex that could pose real dangers for our country as well. Americans are being buried under an avalanche of misinformation and disinformation, enabling the abuse of power. The free press is crumbling. Editors are disappearing. Social media is giving up on fact checking,” Biden said.

Biden’s words were a reference to the world’s richest man, Musk, the owner of social media platform X and the founder of electric-vehicle maker Tesla, who gave massive financial backing to Trump’s campaign and has become one of his closest allies during the transition to Trump’s new administration.

Some of Silicon Valley’s top executives, from Jeff Bezos of Amazon to Mark Zuckerberg of Meta, have also embraced Trump since his electoral victory and are expected to have prime spots at the inauguration ceremony in Washington on Monday.

Biden also used his remarks to cast a positive light on his one-term presidency, which ended with the big political failure of him dropping his re-election bid belatedly in late July, passing the torch of the campaign against Trump to vice-president Kamala Harris — an effort that ended in a bitter defeat.

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Biden’s approval ratings have hit new lows as he bows out from the presidency and a political career in Washington that has spanned more than five decades. Just 36.7 per cent of Americans approve of his performance on the job, and 55.8 per cent disapprove, according to the FiveThirtyEight polling average.

Biden said he hoped his accomplishments would be judged more favourably in the future.

“It will take time to feel the full impact of all we’ve done together, but the seeds are planted, and they’ll grow and they’ll bloom for decades to come,” he said.

Biden has not only faced seething criticism from Republicans, but also rebukes from Democrats who blame him for seeking re-election despite his advanced age. He is now 82.

Biden’s presidency was defined by a record-breaking jobs market and a robust recovery from the Covid-19 pandemic, as well as a series of legislative accomplishments on the economy. But the pain of high inflation became a massive political vulnerability for him.

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In foreign affairs, he took credit for western support for Ukraine after Russia’s full-scale invasion of the country in 2022, but his response to conflict in the Middle East, including staunch support for Israel’s war in Gaza, drew a strong backlash from progressive Democrats, undermining the unity of his political coalition.

It was not until Wednesday, with five days to go before he left office, that Biden — with help from Trump aides — was able to broker a ceasefire deal to free hostages held by Hamas. 

“This plan was developed and negotiated by my team and will be largely implemented by the incoming administration. That’s why I told my team to keep the incoming administration fully informed, because that’s how it should be, working together as Americans,” he said at the start of his address.

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Biden touts major wins in farewell address

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Biden touts major wins in farewell address
Biden touts major wins in farewell address – CBS Texas

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In his farewell address, President Biden warned an “oligarch” of “ultrarich” threatens America’s future.

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