Canadian Rail Strike, August Flash PMI Data, and a September Rate Cut?
Setting the stage for Fed Chair Powell tomorrow
With yesterday’s July Fed meeting minutes pointing to a likely rate cut in September and more recent economic data that supports such a move, the market is waiting to see if Fed Chair Powell’s comments tomorrow bring even more support. Recent developments, including this week’s revision that revealed the labor market added 818,000 fewer jobs than previously reported, suggest the odds of Powell’s tone being even mildly hawkish is low. To us, the bigger question is will those comments be as dovish as the market hopes?
That dovish expectation could be reset based on what the market sees in today’s Flash August PMI data from S&P Global, which will be released at 9:45 AM ET. The Flash Manufacturing PMI is expected to remain in contraction territory with a 49.6 reading, and the market expects a Flash Service PMI figure of 54, down a tick from 55 in July, but still growing. How the composite of those two buckets comes in will be of interest, but ahead of Powell’s comments, the market is likely to place as much focus on the preliminary August temperature for job creation and inflation compared to the last few months.
Following the market rally of the last few weeks, one that has the S&P 500 up almost 10%, signs point to the stock market being near-term overbought. Should today’s August Flash PMI report provide further evidence of a cooling economy, odds are the market will move deeper into being short-term overbought. However, if this report finds the economy is on stronger footing, it could lead investors to take profits, especially as we approach what has traditionally been one of the toughest months for the market.
There is also a potential wild card the market will have to factor into its thinking as it digests that incoming data - the shutdown duration for two of Canada’s major railroads. Estimates suggest that nearly a third of the freight handled by Canadian National (CN) and Canadian Pacific Kansas City Southern (CP) crosses the US-Canadian border. At risk is a disruption to several US industries, including agriculture, autos, home building, and energy. When we hear “disruption” our thinking quickly goes to the risk of renewed supply chain and inflation risks. The duration of the shutdown will be key for those issues and the overall headwind to the economy. We will be interested to see how Powell addresses those risks, if he does, in his comments tomorrow.
Next Week
The next edition of Thematic Signals will be published on Tuesday, September 3. Have some fun in the balance of August and a wonderful Labor Day holiday if you reside in the US. Because of that, we’ll point out that next week brings another swath of retailer earnings, including Nordstrom (JWN), Abercrombie & Fitch (ANF), Foot Locker (FL), and Kohl’s (KSS). Those results and guidance will bring more color for the consumer and our Cash-strapped Consumer model.
Next week also brings the latest from Nvidia (NVDA), Marvell (MRVL), and Salesforce (CRM), but also Best Buy(BBY), Dell (DELL), and HP (HPQ). Those results and guidance will be fodder for our Artificial Intelligence, Digital Infrastructure, and Digital Lifestyle models. And following the recent IT outage, we expect folks will be looking for answers when CrowdStrike (CRWD) reports next week.
Model Musings
Aging of the Population, Cash-strapped Consumers
“Gen Xers between 45 and 54 years old had a median account balance of roughly $60,000 in defined-contribution retirement plans at Vanguard Group in 2023, according to the firm. For most Americans, that is well below the target some financial experts recommend of having roughly six times one’s salary saved for retirement by age 50.” Read more here
Artificial Intelligence
“Walmart executives appear happy with the results of using generative AI to rewrite product listings, saying it is much faster than human workers on this task. They also plan to roll out a new shopping assistant using the technology. Walmart president and CEO Doug McMillon told investors during its fiscal second-quarter earnings call on Aug. 15 that the company has used multiple large language models to create or improve more than 850 million pieces of data in its product catalog.” Read more here
“OpenAI is releasing a new feature that will let corporate customers use their own company data to customize the artificial intelligence startup’s most powerful model, GPT-4o. The move comes as startups face rising competition for their AI products for business, and businesses face growing pressure to demonstrate the gains from investment in AI.” Read more here
Cybersecurity
“Death and taxes have long been life’s unavoidable realities. Now, add to that list the rising prevalence of cyberattacks — and the growing imperative for businesses to defend against them, especially in B2B payments… In today’s hyper-connected world, where the lines between digital and physical operations are blurring, safeguarding against cyber threats has become a cornerstone of business strategy. The stakes are higher, especially for organizations dealing with sensitive financial data and payments, where a breach can lead to financial and reputational damage.” Read more here
“Microchip Technology said on Tuesday an “unauthorized party” disrupted the company’s use of certain servers and some business operations, marking the latest security incident at a U.S. chipmaker this year… Chip giant Advanced Micro Devices had also said earlier this year it was investigating claims that its data was stolen in a hack.” Read more here
Data Privacy & Digital Identity
“Earlier this year, hackers stole the data of 2.9 billion people from a broker. Now, that breach threatens to usher in a wave of identity fraud and other crimes, Teresa Murray, consumer watchdog director for the U.S. Public Interest Research Group, said in a recent Los Angeles Times (LAT) interview.” Read more here
Digital Lifestyle
“Is Starbucks’ mobile app the company’s greatest weakness? Former CEO Howard Schultz has said as much, per a recent podcast appearance. And it’s something new CEO Brian Niccol will likely tackle first when he takes the helm at the coffee chain next month, CNBC reported Sunday (Aug. 18)… CNBC notes that mobile orders make up about a third of the company’s sales, and are typically more complicated.” Read more here
EV Transition
“Ford Motor is adjusting its electric-vehicle strategy in a significant shift for the car maker, slowing EV development while focusing on the vehicles it believes Americans want. On Wednesday, Ford updated its electrification strategy and adjusted its plans for rolling out all-electric vehicles. The company now wants to launch a new commercial van in 2026 and two new trucks in 2027, including a midsize one.” Read more here
Guilty Pleasures
“Prices for robusta beans, a favorite for instant coffee, have soared to the highest since the 1970s. Higher-quality arabica beans earlier this month were priciest in more than two years. Some of that run-up is tied to bad weather: Droughts in robusta powerhouse Vietnam are putting the world on track for a fourth straight year of deficits, while dry weather in Brazil has shrunk the size of its arabica crop as damaged trees churn out smaller beans… It’s not just weather, though, that’s driving up prices. Emerging demand in markets like China promises to keep supplies tight.” Read more here
Homebuilding & Materials
“Toll Brothers Inc. raised its expectations for profit margins for its full fiscal year as lower mortgage rates sparked demand for the company’s luxury homes… With mortgage rates at their lowest point in a year and trending lower, favorable demographics, and continued imbalance in the supply and demand of homes for sale, we are optimistic that demand will remain solid through the end of fiscal 2024 and into 2025…” Read more here
“Looking beyond 2024, easing inflation and more accommodating mortgage rates should improve affordability slightly. This would help stimulate housing activity, with both new listings and sales rising over the longer term.” 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.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
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.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
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.