This Week
This week was mostly about the Federal Reserve rate decision and the artificial intelligence (AI) trade, as well as some developments in the Iran conflict and major economic data.
- Fed leaves rates unchanged, while Chair Kevin Warsh’s comments were seen as “dovish” (soft on inflation). Leaving rates unchanged was expected, but the surprise was Chair Warsh’s comments that the Fed may look to other inflation measures beyond PCE (used for the 2% target), that there are tools beyond rates to manage inflation, and that markets have done some of the Fed’s work. After this, markets priced in higher inflation, pushing 30-year Treasury yields above 5.2% to their highest since 2007! And it’s now up to 5.25% after the three Fed voters who wanted to hike released statements today, including calling for “potentially” multiple hikes.
- AI spending was the focus of Q2 earnings for MSFT (beat), AMZN (beat), and META (miss). MSFT and AMZN both gained after their beats, as AI-related spending is paying off with gains in their cloud businesses, even though AMZN boosted its capex plans by $20 billion. META sold off after earnings declined and it boosted its capex plans by $5 billion. In other mega-cap earnings, AAPL sold off, despite beating earnings estimates, on a weaker-than-expected revenue forecast. After these mega-cap earnings, the Nasdaq-100® is on pace for 75% year-over-year earnings growth in Q2 (not a typo).
- Attacks resume in Iran conflict after four days of peace. The stretch of peace ended with Iran attacking U.S. bases and the Houthis attacking a third Saudi oil tanker. Notably, 14 countries just formed a coalition to protect ships in the Red Sea. So, after falling below $80 per barrel earlier this week, U.S. oil prices are back up to $85.
- U.S. real GDP growth slows to 1.5% in Q2, but domestic demand grew 3.9%. The headline number was softer in part because of AI-related imports, drawing down inventories, and releases from the Strategic Petroleum Reserve (counts against government spending). However, consumer spending grew at a 3.2% annual rate (helped by bigger-than-usual tax refunds), while AI-related investment boosted business investment 8.4%.
So, with the economy doing well and earnings doing very well, the Nasdaq-100® is up 1% this week, while inflation concerns have 10-year Treasury yields up a few basis points to 4.7% (1½-year high).
Next Week
Here are the top events I’m watching next week:
- Monday: ISM Manufacturing PMI (July)
- Tuesday: SPCX Earnings (Q2), JOLTS Jobs Report (June)
- Wednesday: ISM Services PMI (July), ADP Private Jobs (July)
- Thursday: Productivity (Q2), Jobless Claims (week ending Aug. 1)
- Friday: Nonfarm Jobs (July)
