Stocks are lower this morning as oil rises on continued fighting in the Middle East. Bonds and MBS are down.
We have a short week coming up which will be dominated by the CPI report on Friday. We will also get existing home sales and the Producer Price Index. We are in the quiet period ahead of the FOMC meeting next week, so we won’t have any Fed speakers.
The Fed is meeting next week, and the CPI report will loom large in their decision. We had a 9-3 split at the previous meeting over raising rates. On Friday, Trump told the Fed to cut rates or else he would suspend trade with any country that has a trade surplus with us.
Great jobs number just announced, breaking all estimates (except mine!) by double and triple – And you haven’t seen anything yet! EMPLOYERS ADDED 162,000 JOB IN AUGUST. Lower the interest rates because the U.S.A. is a much stronger credit than it was just a short time ago! A STRONG COUNTRY MEANS A LOWER INTEREST RATE – IT’S A BETTER CREDIT…Very simple! We should have the LOWEST RATE of any country in the World, like “the old days.” Without the United States agreeing to allow them their big surpluses, and we could stop that immediately, they would no longer be considered financially ELITE! LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT, which the U.S. Supreme Court, in its ridiculous and very costly Tariff decision, strongly acknowledged “the President” has an absolute right to do. IT’S BETTER THAN TARIFFS! The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change. High interest rates put the U.S.A. at a very unfair disadvantage, and I won’t allow that to happen! President DONALD J. TRUMP
Needless to say, the Fed had no comment on this. I am not sure how moving to autarky (i.e. becoming self-sufficient) would improve the inflation situation, and I am sure this will probably have little consideration at the Fed. Meanwhile the Fed Funds futures see a 58% chance for a hike next week. A lot will ride on the CPI.
Small business optimism fell 1.1 points in August according to the NFIB. Sales and earnings fell but were offset somewhat from a decrease in uncertainty. As an aside, I guess at some point business becomes inured to the chaos and just learns to accept it and move on.
Inflationary indicators were flat, meaning the situation isn’t improving or deteriorating. Labor fell, while credit remains relatively available. The outlook was generally good.
Labor quality / availability was listed as the single most important problem, followed by inflation and taxes. The K-shaped economy is still the biggest driver of the economy right now, with high incomes benefiting from the AI boom while the consumers on lower incomes are getting killed by high energy prices.
Consumer sentiment is low and retail sales show their lack of enthusiasm. Winners in the AI stock market surge are spending on stuff high-income people buy, but most consumers are not included in the party. Meanwhile, spending on AI is booming, creating new fixed assets including power generation, data centers, office buildings, new equipment, etc. These investments have powered the stock market and have released substantial purchasing power as investors “cash in” their success.
But back on Main Street, uncertainty remains high among owners. The Iran War lingers on with many promises that the war was about to end, but it didn’t and hasn’t. This has escalated the cost of energy which raises the price of almost everything. A third (31%) of the owners reported raising their average selling prices and as about as many plan to do so in the coming months. This will not help the Fed get inflation to its goal of 2%. Capital spending weakened, as there’s no AI boom on Main Street, yet. Uncertainty suppresses investment activity. Reducing sources of uncertainty will help bring spending back to higher levels.Job growth is muted on Main Street and more broadly. The resumption of school will add many teachers, and the healthcare industry will continue to produce more employment. But overall, employment growth will remain modest. Construction jobs will benefit from the AI boom but overall, there will not be a surge in employment. Resolving the Iran conflict will provide a major boost to the economy, reducing uncertainty significantly and possibly reducing government spending. If the stock market realizes it is overvalued, domestic spending will slow but remain solid. Otherwise, the economy will behave much as it has for the past year.
