Markets slumped this week as investors encountered a number of headwinds from continuing geopolitical tensions, higher energy prices, rising fiscal deficits, and a pricey AI buildout which could potentially fuel a higher-for-longer inflation and interest rate outlook. The headwinds come amid a mixed economic picture showing strong services and manufacturing measured against a weak housing market. These challenges also happen to coincide with the Federal Reserve heading to its annual Jackson Hole summit next week where investors are sure to tune in for guidance on how the central bank will navigate the current macroeconomic environment.
Key Highlights:
- A growing contingent within the FOMC is leaning hawkish. The Fed Minutes showed officials acknowledging the need for an interest rate hike if inflation doesn’t show more signs of easing toward the central bank’s 2.00% target level. Investors remain on high alert for a potential hike. Markets are currently pricing a 61.60% probability that the central bank will hold rates steady at its September 16th meeting. However, it’s a 50-50 split for a potential rate hike in October.
- A surge in service sector activity and rising optimism fueled business growth to a 52-month high in August. The Flash US Composite PMI rose to 56, up from July’s 54.5. Numbers above 50 indicate expansion while those below signal contraction. The topline was fueled by a surge in services activity which helped offset a manufacturing slowdown. Businesses also saw pricing pressures moderate in August, especially in terms of selling price inflation. However, input cost inflation remained elevated principally due to high energy prices.
- Higher mortgage rates and economic uncertainty weighed on single-family homebuilding in July. Single-family housing starts, which account for the bulk of homebuilding, fell 9.90% to a seasonally adjusted annual rate of 808K units. Meanwhile, permits for future construction of single-family homes, an indicator of future new construction activity, rose 2.50% last month to a rate of 894K units. Despite the increase, builders may remain hesitant to make significant investments in new projects as they work to unload completed homes and those under construction.
Energy, Deficits, and Rates Knock Markets Off Course
Bulls stepped aside this week as stocks and bonds came under pressure from a mix of Middle East tensions, rising oil prices, and a surge in Treasury yields. The headwinds outweighed the economic data which painted a mixed picture on services, manufacturing, and housing. On the geopolitical front, the U.S.-Iran war neared the six-month mark just as the Memorandum of Understanding (MOU) signed by both parties on June 17 expired on August 17 without an extension. With little progress towards a peace deal, the White House signaled a shift in strategy away from active combat operations and toward aggressive economic warfare. The U.S. announced it would initiate crushing economic sanctions and diplomatic isolation against Iran, warning of tremendous economic consequences for any nation assisting Tehran. The news sent WTI to as much as $89 a barrel this week as the breakdown in negotiations keeps the Strait of Hormuz effectively closed to traffic. Higher energy prices also fueled fears of persistent inflation, pushing bonds lower and yields higher. The 30-year U.S. Treasury bond was hit particularly hard, sending the yield surging to 5.29% for its highest level of the year. Further fueling the 30-year Treasury yield’s ascent was news that government debt surpassed the $40 trillion mark for the first time in history, setting another sobering benchmark for fiscal deficits. In an attempt to tame the upward spiral in long-term yields, the U.S. Treasury stepped in on Wednesday announcing a $4 billion debt buyback operation targeting 10-,20-, and 30-year bonds. However, the intervention did little to ease bond investor concerns as bonds continued to sell off on Thursday, weighing heavily on stocks as well with the Dow Jones Industrial Average slumping 700+ points.
Friday brought a bit of a reprieve for investors with the Dow rebounding 517+ points as stocks sought to find their footing. Overall, however, it was a negative week for markets, but not totally unexpected as the risks of persistent inflation and rising deficits have been widely known for some time. Up until this week, investors had been quick to dismiss these very real concerns, focusing their attention on the AI boom instead. Ironically, it is the pricey AI buildout that is contributing to the strain in capital markets as hyperscalers now compete for capital alongside the government at the long end of the interest rate curve. While this week’s concerns focused on energy, deficits, and high Treasury yields – challenging equities in the process- it is important to consider that in many respects long term rates are merely normalizing to longer term norms. Furthermore, while this week’s theme centered on the negative implications of higher rates, higher rates can also be a precursor for higher economic growth, which is ultimately a strong positive for equities. In the near term, however, inflation is something the Fed is unlikely to ignore much longer, prompting a hike later this year and adding a headwind to the year’s rally. We’ll get more color on the central bank’s thinking at next week’s Jackson Hole meeting.
The Week Ahead
Bankers head deep into the woods to ponder monetary policy amid high inflation, oil prices, and Treasury yields at the Kansas City Fed’s annual economic policy symposium in Jackson Hole, Wyoming. On the economic front, traders will pour over durable goods orders and personal income and spending figures.
High Technology has Arrived for the Lowest-Tech Hobbies
As we enjoy the final stretch of summer, the quintessential hobbies that define the warmer months are steadily evolving thanks to modern technology. Pastimes that typically conjure images of slow, lazy afternoons, such as taking a leisurely boat ride to your favorite fishing hole or fishing with a simple pole and a container of worms, are getting a serious dose of engineering.
Boaters are splurging on massive, multi-engine setups that generate more horsepower than a supercar. Today’s offshore anglers are installing giant, 600 horsepower engines on their boats, and not just one, but often in pairs or quads. A 53-foot boat with four large engines installed side-by-side on a boat’s transom generates 2,400 horsepower and can cost millions of dollars. These modified boats can now hit 70 miles per hour which was once an unimaginable speed for a craft of that size. What used to be long, leisurely, meditative treks out to deep-water to a favorite fishing spot is now a white-knuckle thrill ride that can be completed in a fraction of the time. Boat builders say they are simply answering demand from competitive anglers who want to gain the edge that speed delivers, and from recreational fishers who want to maximize every moment of their limited fishing time.
The tech revolution has reached into the tackle box these days, too. Traditional hooks, bobbers, and live worms are being replaced by high-tech lures. The latest is a Japanese-designed bait that looks like an urchin or a tiny tentacled alien. Professionals using urchins have dominated fishing tournaments this season, which has triggered a massive run on this type of weird-looking bait for amateur anglers as well. The urchins defy traditional “match the hatch” bait selection where fishers try to match the bugs, smaller fish, and other prey that fish normally eat. The urchin looks like nothing that lives in the water and costs up to $20, which is expensive for something that could be lost in the water or in a fish that got away. The lures are lightweight and come without a hook. Anglers are left to figure out various ways to rig the urchins by stuffing weights inside the soft plastic center and using different types of hooks. Urchin fishing lures have become one of the fastest-growing and most sought-after categories in fishing,
Another example of high tech taking over low tech hobbies is the rise of front-facing sonar which is underwater technology that uses a boat-mounted transducer that sends out a focused beam of high-frequency sound waves. These waves produce an image on a screen inside the boat that’s so accurate, a fisherman can see fish swimming in real time, watch bait or lures move through the water, and see fish bite or ignore bait. This technology has been highly polarizing in the fishing world. Some argue that new technology is attracting more people to the sport and leveling the playing field in competitions, while critics contend that it diminishes the role of skill and experience, taking the sport out of fishing—and with it, some of its mystery and magic. They call it fishing for a reason.