Markets regained momentum this week on strong tech earnings and Fed Chair Kevin Warsh reassuring markets the Federal Reserve remains committed to fighting inflation without slowing economic growth. The positive sentiment comes despite simmering geopolitical tensions in the Middle East and Canada. With the central bank committed to the fight against inflation, investors will keep a close eye on incoming economic data for a possible September rate hike.
Key Highlights:
- U.S. inflation remained elevated in July. The Fed’s preferred inflation gauge, Core Personal Consumption Expenditures (PCE), which strips out volatile food and energy, rose 0.20% month-to-month and 3.30% year-over-year. July also marked the 65th straight month the annual inflation rate remained above the Fed’s target level. With inflation remaining sticky, consumers reined in their spending for the month despite higher incomes.
- Demand for durable goods remained strong in July. Durable goods, which comprises goods meant to last three years or more, increased 1.10% month-to-month, topping estimates of 0.40%. Transportation led the charge, increasing 2.30%. Excluding transportation, new orders were up 0.40% and were up 1.30% excluding defense.
Markets Climb on Strong Tech Earnings and the Fed’s Commitment to Fight Inflation
Stocks regained their footing this week on the back of strong Q2 earnings and outlooks from tech companies Salesforce and CrowdStrike. The two are known as software as a service (SaaS) companies and have struggled recently amid investor concerns AI tools will displace their businesses. However, a Salesforce earnings beat, strong outlook, and an expanding partnership between Salesforce and AI giant Anthropic eased concerns as investors sent shares surging on Thursday. The partnership also suggests SaaS and AI companies can co-exist across the enterprise platform. With the rise of AI, cybersecurity looks to be well positioned to be at the forefront to help keep systems safe, helping boost earnings at CrowdStrike and bringing fellow cybersecurity stocks Palo Alto and SentinelOne along for the ride. With investors focused on the rebound in tech and eagerly awaiting the Fed’s Jackson Hole meeting for more color on interest rates, investors were quick to dismiss the week’s geopolitical and economic news. On the geopolitical front, Operation Economic Outcast to sever Iran from the global economy commenced with the White House sending timelines to individual countries to shut down activities with Iran or risk being cut off from the U.S. financial system. Tensions were also high with our neighbors to the north. Over the weekend, trade talks between the U.S. and Canada broke down, leading the Trump administration to impose 50% tariffs. Canada responded in kind, matching the duties “dollar for dollar.” Economic news was relatively light with July PCE inflation remaining sticky while durable goods orders were strong.
Friday brought this week’s main event, the Fed’s annual Jackson Hole meeting. This year’s meeting was Fed Chair Kevin Warsh’s first keynote address, which also happens to coincide with a period of elevated inflation above the Fed’s 2.00% target level and a growing national debt which has doubled in size since 2017. The latter has pressured bond rates at the longer end of the curve as investors who lend money to the government are now demanding higher interest rates to fund a growing debt. In his remarks, Warsh reassured investors the Fed remains committed to fighting inflation and pushing it towards its target goal. However, despite expressing concern about elevated inflation, he kept his cards close to his chest as he gave no indication of whether interest rates should be higher nor the conditions that would warrant a change in policy. Markets interpreted the remarks to mean a Fed rate hike may be on the table in September to achieve that objective. Per the CME Group’s FedWatch tool, traders are pricing in a 59.5% chance of a rate hike, up from just 35.4% the day before. Treasury yields responded with yields on the short end of the curve moving higher while those on the long end remained flat. Equities overall took the news in stride, feeling reassured that the central bank remains committed to fighting inflation with no immediate signs of a pivot towards hiking rates too aggressively and effectively slowing economic growth. Markets will now turn their attention to the incoming data as the September meeting approaches and how that will shape the rate outlook for the remainder of the year.
The Week Ahead
Week in Review will pause for the Labor Day holiday. Our next edition arrives on September 11th with the latest CPI, PPI, and consumer sentiment figures.
Farewell, Dolly
The passing of Dolly Parton earlier this week seemed to stop everyone in their tracks to memorialize the singer, songwriter, actor, philanthropist, and entrepreneur and to reflect on Parton’s contributions, not just to the music world, but to humanity. Flags were flown at half-mast across the country, and at Buckingham Palace, the Coldstream Guards Band played “9 to 5” when they heard of Dolly’s death. You can view the performance here, and we highly recommend it! The top of the Empire State Building in New York was turned pink and sparkly beginning at 9:25pm, a nod to the singer’s hit song “9 to 5,” and to honor a monumental life shaped by extraordinary talent and generosity at every turn. You can view photos here.
Dolly grew up in a two-room log cabin in the Great Smoky Mountains as one of twelve children. She had a larger-than-life persona that she famously modeled after a woman in her small hometown in eastern Tennessee who she viewed as glamorous in her youth, quipping with characteristic wit, “It costs a lot of money to look this cheap.” She told a journalist in 1987, “The fact that I look totally artificial and the fact that I am totally real inside has made a nice little magical combination.” Beneath the over-the-top rhinestones, wigs, and makeup was a genuine humanitarian who used her success to lift others up and make the world a better place.
Parton was proud of her Tennessee roots and created her beloved theme park, Dollywood, in the 1980s to help bring employment opportunities and tourism to the state. The park has created more than 23,000 jobs and generates around $1.8 billion annually for the region, according to a 2021 economic impact study. In 1988, Parton established the Dollywood Foundation, introducing a program to decrease the number of high school dropouts by giving away $500 to every seventh and eighth grader who finished high school. She later launched a scholarship fund, giving $15,000 college scholarships for high school seniors who “have a dream they wish to pursue and who can successfully communicate their plan and commitment to realize their dreams.”
Parton grew up watching her father who never learned to read and write and felt that he struggled to reach his full potential. That experience inspired her philanthropy, including creating Imagination Library, a program that has mailed millions of free books to children globally. The idea was simple but revolutionary. What started as a tribute to her father’s struggle became one of the largest early childhood literacy programs in the world. Reflecting on her literacy initiative, Parton said that helping plant the seeds of children’s dreams through books has been one of the greatest gifts in her life.
Parton made million-dollar donations to Vanderbilt University Medical Center, directly supporting early research that developed the Moderna COVID-19 vaccine, and contributed major gifts to pediatric research and children’s hospitals, one of which now bears her name. The East Tennessee Children’s Hospital, a not-for-profit pediatric healthcare system serving the East Tennessee region, was renamed the Dolly Parton Children’s Hospital in recognition of Parton’s decades-long commitment to children’s health and other philanthropic initiatives. Her theme park supports a bald eagle sanctuary where visitors can learn about conservation efforts. Parton established a fund to support victims of the Great Smoky Mountains wildfires, distributing over $12 million directly to displaced families, and provided multimillion-dollar relief to flood victims after Hurricane Helene.
Dolly Parton may have been small in stature, yet she was big in generosity, talent, and spirit and leaves behind a remarkable legacy. Rest in Peace, Dolly.