“Fear is the enemy of logic. There is no more debilitating, crushing, self-defeating, sickening thing in the world – to an individual or to a nation.” ~Frank Sinatra

Good evening,

Fundstrat Head of Research Tom Lee saw this week’s market movements as strengthening his conviction that markets made their bottom on August 5. In fact, as Head of Data Science Ken Xuan noted, the S&P 500 has recovered all of the ground it lost during the recent selloff. “Much of this can be attributed to Tech, Discretionary, and Financials,” he pointed out at our weekly research huddle.

Head of Technical Strategy Mark Newton was on a well-earned break this week, but he nevertheless managed to reach out from parts unknown to comment on the recent rally. “The broader rally from early August is quite constructive and, as such, I do not expect any August drawdown to breach early August lows,” he wrote.

“Probabilities favor the view that the worst is behind us for August,” agreed Lee, but he warned that despite the S&P 500 recording its best weekly gain of the year, “this does not mean bottoms go straight up. Recovering from bottoms is a process,” he told us. Nevertheless, the VIX (volatility index) having fallen back under 20 after its selloff surge to 67 is a “sign of relief,” in his view. (The VIX was at 14.80 as of Friday's close.)

This week, we saw key data showing that inflation continues to decline, while retail sales data points to the economy’s continued resilience. The stock rally that accompanied these numbers suggests that good news is good news again for stocks. 

On Tuesday, wholesale inflation – core PPI – came in at -0.05% MoM, below Street expectations of +0.19%, which foreshadowed CPI data a day later. Headline CPI YoY came in below 3% for the first time since March 2021, continuing a downward trend. July Core CPI came in at +0.17% MoM, better than consensus expectations of +0.19%. 

The internals also provided good news for the Federal Reserve to consider. Shelter and auto-insurance components continued to account for the bulk of inflation, but, as we have noted previously, both these components are lagging relative to current, real-world conditions and will eventually become disinflationary when they catch up. As our Chart of the Week shows below, core CPI excluding these two components came in at -0.04 MoM. 

As Lee told us, “This is now the fourth consecutive ‘soft’ inflation report and, to me, it solidifies the case for the Fed to start a rate-cutting cycle starting in September.” Indeed, Fed Funds Futures trading implies unanimous market expectations for a Fed cut in September, with the uncertainty focused on whether we will see a cut of 25 bp or 50 bp.

Personally, Lee advocates bigger cuts. “The Fed is too tight. This week’s data shows that the median inflation of individual CPI components is 1.18%. With the Fed Funds at 5.50% [upper], this equates to massively high real rates in our view, and we believe Fed Funds should be closer to the neutral rate of 3% or so. So, in our view, bigger cuts are warranted.” But, as Lee concedes, “this is not the market’s stance, nor is it the Fed’s stance.” 

The implied odds of a 50 bp cut fell from 60.7% to 48.6% after the latest CPI numbers came out. As Lee explained, markets would see a 50 bp cut as warranted if we saw either a sudden collapse in inflation numbers (which we did not), or if we saw a degree of economic softness that warrants more aggressive cutting by the Fed. 

However, the numbers this week suggest that the economy is still in reasonably good shape. The headline consumer spending number for July beat expectations, up 1% MoM (versus 0.3% expected). When excluding purchases of gas and cars, consumer spending again beat expectations, up 0.4% MoM (0.2% expected). That’s consistent with the 2Q2024 results reported by retail stalwart Walmart, which beat on both top and bottom lines. “So far, we aren’t experiencing a weaker consumer overall,” CEO Doug McMillon said as he raised the company’s outlook for the rest of the year.  

As Head of Crypto Strategy Sean Farrell put it, “In just a few days, the narrative has shifted. Likely thanks to a combination of non-recessionary yet disinflationary data, the market is now leaning back toward a soft-landing scenario rather than one driven by recession fears.” 

Looking forward, arguably the most important macroeconomic event next week for markets is the Jackson Hole Economic Symposium (August 22-24), where Fed Chair Jerome Powell is scheduled to speak. “We would be surprised to see Fed Chair Powell tilt hawkish at that time, given the benign July Core CPI,” Lee said. “After all, with the yen carry-trade unwind roiling FX, with slowing inflation, and with questions about the health of the labor market and the consumer still lingering, we would expect the Fed Chair to lean dovish.”

Elsewhere

Japanese Prime Minister Fumio Kishida announced plans to step down in September, when his Liberal Democratic Party elects a new leader. Kishida became Prime Minister in 2021 but has since become the focal point of criticism regarding rising living costs, a weakened yen, and his response to a corruption scandal allegedly involving members of his party.

Medicare has negotiated an agreement with pharmaceutical companies on lower prices for 10 medications widely used by senior citizens to treat conditions including cancer, rheumatoid arthritis, and diabetes. The prices, which will go into effect in 2026, represent discounts of 38% to 79% based on 2023 list prices. Roughly 9 million Americans  use at least one of the 10 medications. Officials estimated that the negotiated prices could save the Medicare program as much as $6 billion a year, based on 2023 prices.

Mars Inc. will acquire Kellanova in a $35.9 billion cash transaction that represents a major consolidation in the food industry. The owner of brands such as M&M’s, Kind Bars, and Wrigley’s gum will gain control of the company that owns Kellogg’s cereals, Pop Tarts, and Pringles. 

Sweden reported a diagnosed case of mpox, or monkeypox – the first confirmed case outside of Africa. The announcement came days after the World Health Organization declared mpox a global public health emergency. Though less fatal than smallpox, a related illness, it is regarded as dangerous, with symptoms that include skin lesions. 

Thailand’s parliament has chosen Paetongtarn Shinawatra as its new prime minister. If her last name sounds familiar, it’s likely because both her father Thaksin and aunt Yingluck preceded her in this role. (Both were deposed in military coups, a part of family history she presumably hopes to avoid repeating.) Paetongtarm Shinawatra will be the youngest PM in Thai history.

The Federal Trade Commission announced a ban on marketers generating and/or using fake reviews created by generative AI. By unanimous vote, the FTC also voted to ban other misleading marketing practices such as using bots to artificially increase follower count so as to misrepresent the marketer’s influence, or paying for positive or negative reviews.

And finally: Charlie Moss, the ad executive who helped create the evergreen “I ♥ NY” tourism campaign in the 1970s when New York City was decidedly not tourist-friendly, has died. Moss was also responsible for other campaigns familiar to Americans of a certain age: Alka-Seltzer’s “Plop, plop, fizz, fizz” and the “Flick your Bic” campaign for Bic cigarette lighters were also his ideas.