August Retail Sales, Waiting for the Fed
Rate cut expectations rise further, does the data support it? More model signals!
Equity futures point to the recent Wall Street rally continuing this morning, but that could change subject to what the 8:30 AM ET August Retail Sales report says about consumer spending activity. The consensus forecast calls for August retail sales ex-gas and ex-auto to rise 0.3% compared to July, a bit slower than the 0.4% figure posted in July. While a relative decline, there are reasons to think the August figure could come up short relative to expectations.
Comments from companies ranging from Ally Financial (ALLY) and Kroger (KR) underscore consumers trading down and becoming increasingly selective in their purchases. There is also the potential for July’s Amazon (AMZN) Prime Day event as well as competing efforts from the likes of Walmart (WMT) and Target (TGT) to have pulled forward shopping activity, especially for Back-to-School items. Our thinking has been consumers have re-embraced digital shopping to stretch their spending dollars, a view that sits at the intersection of our Cash-Strapped Consumer andDigital Lifestyle models.
The August Retail Sales figures as well as those from the August Industrial Production report out at 9:15 AM ET this morning will be factored into the next update for the Atlanta Fed’s GDPNow Model out later today. We and we suspect many others ahead of the Fed concluding its policy meeting tomorrow will be interested in this update and how it stacks up against the recent 2.5% rolling GDP forecast figure for the current quarter.
Over the last few days, the market’s expectation for the Fed to deliver a 50-basis point rate cut following tomorrow’s policy meeting has grown, eclipsing the odds of a 25-basis point cut per the CME FedWatch Tool. This only adds to our thinking the market is way ahead of itself when it comes to the number of likely rate cuts the Fed telegraphs in its updated set of economic projections that will be published tomorrow afternoon. It’s not the first time we’ve seen this market behavior and it has once again opened the door to the market being disappointed by what is found in the Fed’s policy statement and projections.
Would we like the Fed to go big? Sure we would because it would benefit our Homebuilding & Materials, Rebuilding America, and other models. The issue is that, given its nature, the Fed will take a more measured approach, especially given the sheer volume of August data that tallies in favor of a soft economic landing, not the hard one implied by what’s depicted in the CME FedWatch Tool. How else would you describe expectations for the Fed Funds rate to go to 275-300 basis points by the end of 2025 compared to their current level between 525-550 basis points?
If that leads you to think the market resetting its expectations could call for some hedging, we wouldn’t disagree. For times like this, it’s why we have the Market Hedge model in our lineup.
Model Musings
Aging of the Population
“mong currently retired people, 71% say they’re not working in any capacity, according to CNBC’s August 2024 Your Money retirement survey conducted with SurveyMonkey. Among those who are working, 17% say they’re doing so by choice, with just 11% reporting working because they have to. The next generation of retirement savers seems less eager to relax once they leave their 9-to-5. Just 11% of would-be retirees surveyed by CNBC say they don’t plan to work in any capacity after they retire. More than a third of respondents — 36% — say they’re not sure, while the majority, 53%, anticipate working, either because they’ll want to or to supplement their income.” Read more here
Artificial Intelligence
“Venture capital giant Sequoia Capital believes the bulk of billion-dollar companies created in artificial intelligence will come from making applications rather than building models, although it is investing in both, partner Pat Grady said at a conference Wednesday… “We have an order of magnitude more dollars invested at the application layer, even though the revenue being generated at the application layer is a lot less,” he said, referring to AI companies that build products that use the models in novel ways. But in AI, “it seems to us that the application layer is where the largest number of billion-dollar-plus companies is going to come.” Read more here
Cash-strapped Consumer, Digital Lifestyle
“Holiday retail sales are likely to increase between 2.3% and 3.3% in 2024, according to Deloitte’s annual holiday retail forecast… Following a sharp rise in spending post-pandemic, this season’s retail sales are expected to moderately increase in line with trends over the past decade,” said Michael Jeschke, principal, Deloitte Consulting LLP, and Retail & Consumer Products leader. “Our forecast indicates that e-commerce sales will remain strong as consumers continue to take advantage of online deals to maximize their spending.” Read more here
Cybersecurity, Data Privacy & Digital Identity
In January 2024, an employee at a Hong Kong-based firm sent US$25 million to fraudsters after being instructed to do so by her chief financial officer on a video call that also included other colleagues. It turned out, however, that she wasn't on a call with any of these people: Fraudsters created a deepfake that replicated their likenesses to trick her into sending the money. Incidents like this will likely proliferate in the years ahead as bad actors find and deploy increasingly sophisticated, yet affordable, generative AI to defraud banks and their customers.” Read more here
“Cybersecurity giant Fortinet has confirmed it suffered a data breach after a threat actor claimed to steal 440GB of files from the company's Microsoft Sharepoint server.” Read more here
Digital Infrastructure
“Virginia’s story is just one thread of the messy, delayed rollout of a $42 billion national program championed by Democrats in particular, but with big potential payoffs in Republican districts as well….The federal grant program has now green-lighted applications from 34 states, which will let them start accessing the first share of federal aid. But given the lengthy negotiations over the terms of their plans, the administration doesn’t expect broadband projects funded by the marquee program to launch in earnest until 2025.” Read more here
Digital Lifestyle
“Streaming revenue is going to hit $17.3 billion in 2024, earning more than Pay TV for the first time. But what exactly is “streaming revenue” today? According to the report, about half, $9 billion, will come from advertising, while the rest will come from subscription and pay-on-demand revenue.” Read more here
Digital Payments
“Generation Z—the age group between 18 and 26—has an overwhelming preference for digital wallets, per PYMNTS. So much so that, in a separate study, 78% of Gen Zers said they’d stop shopping at a merchant that didn’t accept digital wallets. Gen Z prefers digital wallets like Apple Pay and Google Wallet because they provide a convenient and secure way to make in-store and online purchases without exposing sensitive debit or credit card data to risk.” Read more here
“When asked about their digital wallet usage, 53% of survey participants responded saying they used digital wallets more often than traditional payment methods, such as paying with cash or swiping a physical debit or credit card. This is especially true for younger consumers.” Read more here
Safety & Security
“Intel Corp. has officially qualified for as much as $3.5 billion in federal grants to make semiconductors for the Pentagon, according to people familiar with the matter, after the chipmaker reached a binding agreement with US officials. The secretive program, called Secure Enclave, seeks to establish production for advanced chips with military and intelligence applications.” Read more here
“The Pentagon is undertaking a multidecade project to modernize the US nuclear arsenal — put plainly, to ensure that the US has nuclear weapons and delivery systems that really work. But all three aspects of that modernization — the bomber force, land-based missiles and ballistic-missile submarines — are behind schedule and over budget. The US is struggling to update missile silos and other vital infrastructure.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
Digital Payments - This model focuses on companies benefitting from the accelerating structural adoption of digital payments and financial technology (FinTech).
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.