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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.
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.
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:
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.
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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