Month: July 2024

Hours before Donald Trump was shot by a would-be assassin on Saturday, President Joe Biden became absolutely unhinged during a Zoom call with Democrats to discuss whether he should abandon his bid for reelection.

According to Puck News,

Right before the Trump rally in Butler, Pennsylvania, a group of moderate Hill Democrats held a “tense” Zoom call with the White House to express their concern about Biden’s ability to win—and their ability to win, should he tank and take them down with him. “The call was even worse than the debate,” one of the participants told me. “He was rambling; he’d start an answer then lose his train of thought, then would just say ‘whatever.’ He really couldn’t complete an answer. I lost a ton of respect for him.”

What’s more, Biden had a ‘particularly troubling exchange’ with Rep. Jason Crow (D-CO) – a former Army Ranger who served three tours of duty in Iraq and Afghanistan – in which Biden said “Tell me something you’ve never done with your Bronze Star like my son,” referring to Beau Biden – an Army lawyer who served in the National Guard and was deployed to Iraq, who as the Attorney General of Delaware gave a DuPont heir a plea bargain that spared him prison time for raping his young daughter.

Well, Crow didn’t die doing one of those tours like Beau did.

— Mostly Peaceful Cat (@MaxPaxCat) July 17, 2024

Even CNN is reporting it…

CNN; Biden gets nasty w/ Bronze Star Democrat @JasonCrowCO on “absolute disaster” Zoom Call, tells him to “cut that crap out” after Crow voiced concern about Biden’s diminished abilities. pic.twitter.com/1X0w1MUYYH

— Tom Elliott (@tomselliott) July 17, 2024

As Puck‘s Julia Ioffe writes of a portion of the Zoom call she was able to view, Biden starts shouting at Crow, saying “First of all, I think you’re dead wrong on national security,” at times garbling his words as he became emotional. “You saw what happened recently in terms of the meeting we had with NATO. I put NATO together. Name me a foreign leader who thinks I’m not the most effective leader in the world on foreign policy. Tell me! Tell me who the hell that is! Tell me who put NATO back together! Tell me who enlarged NATO, tell me who did the Pacific basin! Tell me who did something that you’ve never done with your Bronze Star like my son—and I’m proud of your leadership, but guess what, what’s happening, we’ve got Korea and Japan working together, I put Aukus together, anyway! … Things are in chaos, and I’m bringing some order to it. And again, find me a world leader who’s an ally of ours who doesn’t think I’m the most respected person they’ve ever—”

“It;’s not breaking through, Mr. President,” Crow replied, “to our voters.”

“You oughta talk about it!” Biden fired back – rattling off several accomplishments. “On national security, nobody has been a better president than I’ve been. Name me one. Name me one! So I don’t want to hear that crap!”

“How is this tenable?” One campaign source told Ioffe, adding “We’re in a perfect shitstorm until he steps down or everyone gets back on board.”

Of note, nearly 2/3 of Democrats want Biden to step down, according to an AP-Norc poll released on Wednesday.

By Peter Earle of the American Institute for Economic Research

As high inflation enters its third year and disinflation slowed, the impact of broad price increases are seeping into increasingly far flung areas. They are seen and felt not only in the prices of capital, producer, and consumer goods, and in the prices of securities and commodities, but also in goods and services procured through the government. 

In some, adjustments have been made. The most recent Cost-of-Living Adjustment (COLA) for Social Security benefits was a 3.2-percent increase. That adjustment affects more than 66 million Social Security beneficiaries and around 7.5 million recipients of Supplemental Security Income (SSI), whose increased payments began on December 29, 2023​. Medicare Part D, and particularly the catastrophic coverage phase, also saw a modification through 2022’s so-called Inflation Reduction Act (IRA). Those changes eliminate the 5 percent coinsurance requirement for enrollees in the catastrophic phase starting in 2024, effectively capping out-of-pocket expenses. In 2025 additional changes will kick in, including a $2,000 annual cap on out-of-pocket drug spending and the elimination of the coverage gap phase. The changes are intended to provide more consistent cost-sharing throughout the year, reducing the financial strain on beneficiaries and in particular those with significant prescription drug needs.

On the other hand, Medicare payments to physicians do not, and have not, been adjusted for inflation. Over the last decade, in fact, the American Medical Association estimates that rates have been cut by ten percent. The reimbursement rates for Medicare are set by the Centers for Medicare & Medicaid Services (CMS) and are updated annually through various fee schedules, primarily the Medicare Physician Fee Schedule (MPFS). In recent years, updates have been minimal and have not kept pace with the rising costs of providing medical care, which has in turn led to financial pressure on healthcare providers. While Medicare Part D changes reduce out-of-pocket drug costs for patients, they do not affect the reimbursement rates doctors receive for their services. Since 2001, physician payments have fallen 30 percent behind the rate of inflation. The difference highlights a broader issue in healthcare policy, where measures to ease financial burdens on patients are not always extended to healthcare providers.

There are several reasons why Medicare payments to physicians are not automatically adjusted for inflation. Budget constraints play a significant role; Medicare costs comprise a substantial portion of the federal budget, and automatic inflation adjustments could significantly increase their budgets. Congress and policymakers often prioritize controlling healthcare spending to manage the overall federal budget and reduce deficits. That physicians represent a far smaller voting bloc than the 19.4 percent (65.7 million) of Americans who are Medicare recipients is undoubtedly a major contributing factor.

The Omnibus Budget Reconciliation Act (OBRA) of 1989 required that Medicare spending not increase overall fiscal spending. That is to say, adjustments to payments, methods, or policy changes are required to be accompanied by finding savings or outright reductions within the program, ensuring its neutrality. For this reason, nominal reimbursement rates have fallen virtually every year. A history of attempts to wrangle government expenditures while contending with rapidly changing technology, demographic shifts, and in the case of healthcare rising longevity is beyond the scope of this article, but offered here. It brings to mind Ludwig von Mises’ many critiques of interventionism, but particularly those which arise of its cumulative effects: each tinkering and tweak leads to unintended consequences, which over time leads to new unintended consequences, further interventions, and on it goes.

In 2023, the CMS approved a 3.37 percent reduction in Medicare physician payments for 2024, which took effect on January 1. This was later reversed in part, as described in this blog post from March 7, 2024.

Last Sunday, Congress released the text of a minibus package, which will likely be signed into law by tomorrow. While the bill’s primary purpose is to keep the government open, it also includes healthcare extenders through the end of the calendar year, as well as several notable healthcare policies … The minibus includes a 1.68 percent reduction to the 3.37 percent cut to the Medicare Physician Fee Schedule (MPFS) conversion factor (CF) that physicians and other clinicians are currently facing. The 3.37 percent CF cut went into effect on January 1, 2024, and this provision would effectively reduce that cut to 1.69 percent for the rest of the calendar year (3.37 percent – 1.68 percent). It will be in effect as of March 9, 2024, and will not impact payments for services delivered between January 1 and March 8, 2024. In other words, the fix is NOT retroactive, but will apply prospectively.

Changes to Medicare reimbursement rates are determined through legislative processes. The reimbursement rates are influenced by various political and economic factors, and automatic adjustments for inflation have not been a priority. Historically, the Sustainable Growth Rate (SGR) formula was used to control spending by tying updates to physicians’ fees to the rate of US economic growth. This, however, has at times led to scheduled cuts in physician payments, which Congress has almost as frequently postponed through temporary “doc fix” measures. The SGR was replaced by the Medicare Access and CHIP Reauthorization Act (MACRA) in 2015, but automatic inflation adjustments were not included in the new system. 

Current policy trends favor value-based payment models over traditional fee-for-service models, with the former aiming to reward quality and efficiency over a sheer volume of services. The emphasis on value-based care has also shifted focus away from across-the-board fee adjustments. Any implementation of automatic inflation adjustments would require consensus among lawmakers, which is likely to be especially contentious today in the face of record debt and deficits, in addition to divergent spending priorities and a widening gulf on views of the proper role of government where healthcare is concerned.

While physicians and other health professionals are at times written off with the same dismissal that “the rich” are broadly, the accelerating insufficiency of Medicare to keep pace with inflation directly and critically impacts medical care in the United States. Financial pressures resulting from stagnant or falling real Medicare reimbursement rates have effects on physicians, patients, and the entire healthcare system.

Declining reimbursement rates, on top of losses in purchasing power, result in reduced access to care, as some physicians have limited the number of Medicare patients they accept or have stopped accepting new Medicare patients altogether. Regardless of the basis upon which medical practices reduce the percentage of Medicare patients among their patient base, the ultimate result is less care for those most likely to be in the Medicare system: senior citizens and individuals with disabilities. Physicians in smaller practices, or practicing in higher cost-of-living areas (big cities in particular) are likely to compensate for the growing gap between expenditures and reimbursements by capping staff compensation, reducing headcount, delaying or forgoing new equipment/technological investment, and minimizing (or eliminating) office space. In some cases, doctors have wrestled with reimbursement rates lagging behind inflationary pressures by increasing their patient volume, opting instead for shorter appointments, longer hours, increased stress, and burnout.

Medicare is an entitlement program, in many ways exemplifying government intrusion into what historically has been a more market-oriented sector. Established in 1965, Medicare is now deeply integrated into the fabric of the medical profession, the insurance industry, the broader healthcare sector, and the lives of U.S. citizens. While the rationale for gradually reducing Medicare funding may seem logical — it seems less so when considered alongside expanded military spending and gifts to foreign governments — the considerable inflation since 2021 poses new risks.

If the widening maw between the expenses of medical practice and Medicare compensation persists or worsens, more physicians are likely to transition to concierge or direct primary care models in which patients pay a retainer for more personalized care. Such a transition would reduce the number of physicians available to the general Medicare population on top of the cost-cutting measures which have already taken place, further denigrating the quality of care provided: fewer available appointments and shorter visits in particular. And if the cost crunch continues, smaller practices are likely to merge with larger healthcare systems or be acquired by hospital networks to achieve economies of scale. A falling number of independent practices reduces competition, lowering the efficiency, accessibility, and quality of healthcare. Over time, those effects will impact not just Medicare beneficiaries, but all consumers of US healthcare services, which are increasingly inundated with an aging Baby Boomer generation.

Inflation was not caused by Vladimir Putin, gas station owners, corporate profits, or ocean shipping firms. Neither was it “9 percent” when the Biden administration took office, “zero percent” in July 2022, or higher everywhere else in the world two Octobers back. The cause of inflation is found in massively expansionary monetary policy operations during the pandemic — a period of time during which incredible demands were made of healthcare professionals at all levels — and aggravated by massive fiscal spending. While in the case of Medicare reimbursement there seems for once to be a reluctance to add to Federal spending, the broader implications of lagging recompense on the healthcare system and the well-being of those who depend on Medicare should be more closely examined.

Given the US healthcare system’s substantial distance from market forces, chances are slim for reform in the near-term. It is nevertheless critical that even in their bloated, interventionist form, government-dominated systems implement incentives that correlate compensation and performance with the provision of quality, adequate healthcare. And at the very least, they should not intensify the financial duress by failing to account for spiraling prices. This can and should be done while simultaneously addressing Washington DC’s large and growing fiscal and monetary mismanagement, which began long before the first utterance of COVID-19.”

By Peter Tchir of Academy Securities

Three quick things to think about today.

Chips

Markets are reacting to concerns that the U.S. may adopt harsher restrictions on Chinese trade and the semiconductor industry.

We have been arguing that semiconductors are firmly entrenched in the national security mindset. The development and production of chips are major concerns at the national security level. While much of the focus has been on high tech and future tech, the concern has been expanding. “Dual Use” chips and technology is increasingly in the crosshairs of the national security community. Technology that may have mundane uses, is also showing up in less mundane things – from targeting systems to drones.

Expect two things:

• The national security focus on chips and technology to continue.

• That the national security issues will “remain above the fray” or “transcend” politics. Each party and politician will have their own views on what is necessary for security or not. But, and this is an important but, many will be saying things during the campaign that haven’t benefited from the latest briefings, highlighting how crucial policies might be to national security.

Expect a choppy ride, and don’t expect much to change after the election.

The Russell 2000 Has Been “Ratioed”

There are many ways to look at stock market indices. We focused on equal weight indices and concentration in Breadth & Liquidity. Rarely do we think of indices in terms of market capitalization. Individual companies, yes, but indices, no? What stuck me as “odd” or “interesting” is that as of last Friday, the market cap of the Russell 2000 was less than $3 trillion. Yes, the S&P 500 is meant to pick up at least 80% of the market cap of U.S. stocks, but it has grown to closer to 90%. Yes, there is a “survivorship” bias in the Russell 2000 that keeps the market cap smaller (companies that grow eventually get “promoted” out of the index. So there are many reasons to not think about market cap, but it also seems odd that you can pick up 2000 or so companies, for the price of just a few (or even one) company. Since getting “ratioed” on twitter (now X) is a bad thing, maybe it is in markets as well?

Not a chart we’ve ever looked at before, and not sure how useful it is (given what the indices are meant to represent), but it also reminds me of a “roulette” table. How many people bet all their money on one or two numbers? People spread their bets, they bet “red or black” or other low payout bets. From a simple “liquidity” standpoint, it doesn’t take much to move any individual stock in the Russell 2000 (they are small). Add to that, the view that many of these stocks are underowned, and it really doesn’t take much of a flow to move the needle.

Maybe saying that for most of the past 10 years, you could get 10 Russell 2000’s for every one S&P 500, and now it is 16 is silly? But this is a country that loves sales, so maybe it isn’t? The combination of underperformance, low liquidity, especially in the summer, and underinvestment could be a powerful combination for small cap outperformance! (as of this weekend’s report, the smallest 250 companies in the S&P 500 had an average year to date return of 0%!)

US industrial production rose a better than expected 0.6% MoM in June (double the 0.3% jump expected but slower than the 0.9% surge in May). This pulled industrial production up 1.6% YoY – the best since Oct 2022…

Source: Bloomberg

Manufacturing production also surge in June (jumping 0.4% MoM vs +0.1% exp) and May was revised up from 0.9% to +1.0% MoM). That MoM jump pulled the YoY change up to +1.1%…

Source: Bloomberg

Capacity Utilization also increased significantly to 78.8% in June…

Source: Bloomberg

It’s not all sunshine and rainbows though as computer and peripheral equipment production puked in June (most since COVID lockdowns) as Utes saved the month…

Source: Bloomberg

Is this good news gonna help the bad news-sponsored rate-cut euphoria?

Saturday’s near-assassination of Donald Trump likely boosted the former president’s chances of winning the November election — and also forced a pause in what had been a steadily-boiling controversy over President Biden’s fitness to finish the race and start a new term. 

While Biden’s mental deterioration was nudged out of media spotlight, his campaign was quietly scheming with the Democratic National Committee to orchestrate a “virtual nomination” held weeks before the party convention kicks off on August 19. Now, indignant anti-Biden Democrats on Capitol Hill are organizing a counter-strike.

Biden allies trying to avoid “shitshow in August,” in the words of one, by solidifying nom before DNC.

But Dems on the Hill are working to formalize outrage to a virtual process they say is indefensible post-debate

W/ @jeffzeleny @mj_lee @mkraju @AnnieGrayerCNN…

— Kayla Tausche (@kaylatausche) July 16, 2024

“I just think it’s a terrible idea for the DNC to do this. I just think people see right through it,” said progressive California Rep. Jared Huffman. “At a time when we have this huge enthusiasm gap with the Republicans, to do a stunt like this is just going to make it worse.” Separately, he told CNN, “If the election were held today, he would get crushed. We have got to do something about it.”

The DNC, which rigged the primary process for Biden by refusing to host debates and by rearranging the sequences of state balloting, is now working to hold a “virtual roll call” where delegates would vote online between July 29 and Aug. 5, Axios reports. However, the New York Times reported voting could start as early as Monday, July 22.     

Either way, the extraordinary advance vote would serve two DNC goals: icing the contest for Biden and avoiding a tumultuous, contested convention next month in Chicago. Democratic “insiders” told the Times that upwards of 80% of delegates would back Biden in a virtual vote. 

“The numbers are getting worse for the president.” CNN says Trump could achieve a blowout win of 330 electoral votes, “or higher”. (Video: CNN) pic.twitter.com/u1yGEd3sMJ

— Mike Sington (@MikeSington) July 17, 2024

Congressional Democrats who see Biden as a doomed candidate — who threatens to carry down-ballot candidates with him — are now racing against the clock to keep their drive to replace him alive. At the moment, they’re channeling their energy into drafting and circulating a joint letter from House Democrats to the DNC, urging party headquarters to cancel its plan. Here’s a passage from a draft obtained by the Financial Times: 

“Stifling debate and prematurely shutting down any possible change in the Democratic ticket through an unnecessary and unprecedented ‘virtual roll call’ in the days ahead is a terrible idea. It could deeply undermine the morale and unity of Democrats — from delegates, volunteers, grassroots organisers and donors to ordinary voters — at the worst possible time.” 

“People are back to being angry at Biden and a push to sign on to this letter is going around … the ‘replace Biden’ movement is back,” said an unnamed Democratic representative. 

Texas Rep. Lloyd Doggett, the first congressional Democrat to urge Biden to quit the race, said the virtual-nomination scheme was inconsistent with Biden’s own comments: “Such misguided DNC action would be contrary to President Biden’s own recommendation that those seeking an alternative nominee come to the convention.”

Biden is angry about the efforts to oust him: “I’m getting so frustrated by the elites in the party. Challenge me at the convention!” pic.twitter.com/FLMFcHq7ZM

— TheBlaze (@theblaze) July 8, 2024

A key milestone in the intrigue will come at 11am this Friday, when the convention’s rules committee conducts a video call. “A majority of its members have deep ties to Mr. Biden and were vetted for their loyalty to him,” reports the Times. Contrary to Axios, the Times reported that virtual nomination balloting could start as early as Monday, July 22.     

One House representative used creative imagery to describe dissidents’ view of the situation, telling CNN, “The disbelief that they’d expedite the nomination is as widespread as the recognition the DNC is leading Democrats into a house fire with water bottles.”

Word of the behind-the-scenes maneuvering comes as new polling by YouGov shows Trump leading in all seven battleground states. His lead is narrowest in Michigan (+2) and Pennsylvania (+3), and largest in Arizona (+7). Notably, the poll was taken after Biden’s alarmingly poor June 27 debate with Trump, but before Trump survived the assassination attempt at a rally in western Pennsylvania. 

Beyond the Biden camp, there’s another group that’s wildly enthusiastic about the idea of a virtual vote that locks in the failing, 81-year-old as the Democrats’ standard-bearer: Republicans. When asked what he thought of the DNC’s maneuvering, Citizens United president and Trump 2016 deputy campaign manager David Bossie said, “Great idea. I want that hole in the Titanic as soon as possible.” 

Authored by Courtney Graves via The College Fix,

The status of Stanford University’s controversial Internet Observatory, a research group accused of participating in social media censorship, appears unclear after recent conflicting reports about its future.

A recent report by the tech newsletter Platformer suggested the observatory may be closing after several key staffers, including founding director Alex Stamos, left or did not have their contracts renewed.

Other news outlets reported the observatory was “collaps[ing] under pressure,” being “wound down” and “closing.” Some popular social media posts suggested it was being permanently “shut down.”

However, the university contradicted those reports in a recent statement on the observatory’s website.

“Stanford has not shut down or dismantled SIO as a result of outside pressure,” it stated. “SIO does, however, face funding challenges as its founding grants will soon be exhausted. As a result, SIO continues to actively seek support for its research and teaching programs under new leadership.”

SIO will continue its “critical work” through the “publication of the Journal of Online Trust & Safety, the Trust & Safety Research Conference, and the Trust & Safety Teaching Consortium,” it stated.

Furthermore, the observatory’s staff will be conducting research on “misinformation” during the 2024 election, according to the statement.

The observatory is a non-partisan, on-campus political research group that focuses on the misuse of social media, including issues related to elections and COVID-19 vaccine misinformation, according to its website.

But it has faced criticism for its role in a joint project called the Election Integrity Partnership with the University of Washington during the 2020 and 2022 elections. Its purpose was to “defend our elections against those who seek to undermine them by exploiting weaknesses in the online information environment.” However, reports allege the universities frequently collaborated with the U.S. Department of Homeland Security in order to censor what they viewed as “misinformation” online.

According to the Stanford’s recent statement, its SIO project will continue under new leadership. It also stated “Stanford remains deeply concerned” about congressional and legal efforts to “undermine” the legitimacy of “much needed academic research” at universities across the country.

University spokesperson Mara Vandlik directed The College Fix to the statement in an email Wednesday in response to multiple inquiries about the observatory’s future. Vandlik did not respond to a follow-up email asking for more details about the observatory’s 2024 election research and the online censorship accusations.

Meanwhile, a receptionist at the university president’s office told The Fix on Wednesday to send its questions via email, but the office did not respond to the email.

Matt Taibbi, who has written extensively about online censorship as the publisher of Racket News, said he would not be “too quick to celebrate” if the Stanford Internet Observatory truly is closing.

“Rumors persist that even more aggressive EIP-type programs are in development for use in this cycle, perhaps not under Stanford’s roof, but somewhere, using some of the same personnel and making use of support from deep-pocketed funders of anti-disinformation programs,” he wrote in a recent article on his substack.

Mike Davis, founder and president of the Article III Project and former chief counsel for nominations to Senate Judiciary Chairman Chuck Grassley, said he also thinks censorship problems are more wide-spread.

“College campuses are the central battlefield for Americans’ freedom to speak their mind. A culture of censorship is pervasive at college campuses, and there’s no reason to believe this was an isolated incident,” he told The Fix in a statement via email this week.

According to a Real Clear Investigations report, the Election Integrity Partnership “surveilled hundreds of millions of social media posts and collected from the cooperating government and non-governmental entities that it calls its ‘stakeholders.’” According to the report, this could be a potential violation of “social media platforms’ policies concerning election speech.”

Team members of the partnership would “highlight a piece of offending social media content, or narrative consisting of many offending posts, by creating a ticket, and share it with other relevant participants by tagging them,” according to the report.

This would then prompt social media companies to take action by “removing the content outright, reducing its spread, or ‘informing’ users about dubious posts by slapping corrective or contextualizing labels on them,” the report states.

During the 2020 election cycle, “EIP generated a total of 639 tickets, covering some 4,784 unique URLs … disproportionately related to the delegitimization of election results,” according to the report.

Platforms such as Twitter, Google, and Facebook responded to tagged tickets at a response rate of 75 percent or higher; the platforms “labeled, removed, or soft-blocked” 35 percent of the URLs shared through EIP, the report states.

Taibbi wrote the EIP scheme occurred on as many as 10 different platforms, including Twitter, now known as X. However, Stanford has outright denied its actions of “switchboarding” and “censorship,” he wrote.

According to Taibbi, Stanford also wrongly claimed the Election Integrity Partnership did not “receive direct requests from the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) to eliminate or censor tweets” and “did not make recommendations to the platforms about what actions they should take.”

According to Taibbi, a U.S. House committee investigation, led by Republican Congressman Jim Jordan, found 75 instances of the EIP ticketing system specifically using the words “recommendation” or “we recommend.”

“Imagine the arrogance of denying that one makes concrete recommendations while sitting on a pile of documents doing exactly that,” Taibbi wrote.

“As for not receiving direct requests to eliminate or censor tweets,” he wrote, “a combination of emails Jordan’s team dug up and documents we ourselves either had in the Twitter Files or obtained via FOIA made it clear that the EIP’s labyrinthine reporting system was designed so the government could deny it originated complaints, while EIP could deny it received complaints from the government.”

Moreover, Taibbi wrote EIP’s opinion on removing content had a large effect on whether a social media platform decided to remove the content.

The EIP even allegedly “chastised sites like YouTube that expressed hesitancy about removing ‘misleading’ content,” according to Taibbi.

Additionally, the observatory is being sued. One case accuses the university of “conspiracy” with the federal government to violate the First Amendment rights of social media users, The Fix reported.

Housing Start s and Building Permits rose more than expected in June (+3.0% MoM and +3.4% MoM respectively) and May’s disappointments were revised modestly higher too (-4.6% MoM and -2.8% MoM respectively)…

Source: Bloomberg

That lifted the SAAR totals for both starts and permits just off their COVID lockdown lows..

Source: Bloomberg

The modest rebound in permits – forward-looking – appears to have been triggered by a renaissance in Fed rate-cut hopes…

Source: Bloomberg

Under the hood things are very uneven with multi-family unit permits and starts soared while single-family home permits and starts both declined…

Source: Bloomberg

Not a great picture for the housing market with four straight months of declines in single-family home construction plans (inventories high) and renter nation demand growing (inflation?).

• June single family starts -2.2% to 980K SAAR, lowest since Oct 2023

• June multi-family starts +22% to 360K SAAR, highest since Feb 2024

• June single-family permits -2.3% to 934K SAAR, lowest since early 2023

• June multi-family permits +19.2% to 460K, highest since Feb 2024

And as ‘Starts’ languish near COVID lockdown lows, ‘completions’ are at their highest since Jan 2007…

“If we build them, they will buy?” is not working…

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

On December 5, 1996, Chairman of the Fed Alan Greenspan offered that stock prices may be too high, thus risking a correction that could result in an economic fallout. He wondered out loud if the market had reached a state of “irrational exuberance.”

Over the past few months, we have seen the same term, irrational exuberance, used to describe the current state of the stock market. To gain perspective on the future, let’s compare the market environment that prompted Greenspan’s comments to today. 

Irrational Exuberance

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy. –Alan Greenspan December 1996

The simple translation: Greenspan was apprehensive due to high stock valuations; therefore, a correction of stock prices could damage the economy. He didn’t want to be “complacent about the complexity of the interactions of asset markets and the economy.”

Let’s review a few graphs to appreciate Greenspan’s point of view.

In just two years, between 1994 and the day Greenspan uttered irrational exuberance, the S&P 500 had risen nearly 60%. Furthermore, from the 1990 recession trough to his speech, the S&P had climbed almost 250%. 

The economic recovery from the recession of 1990 kicked off the bull market. Further fueling the run were fabulous projections of how the budding World Wide Web, computers, and the powers of modern technology would result in outsized corporate profits and economic growth. Sound familiar?

With such lofty projections came immense speculation. Investors were willing to pay more for corporate sales and earnings due to higher growth prospects. In other words, valuations rose.

The first graph below shows the Shiller CAPE10 valuation stood at levels last seen in 1929 and were moderately higher than those at the peak of the Nifty Fifty Bubble. For more on the Nifty Fifty, check out our article Are The Magnificent Seven In A Bubble? Ask The Nifty Fifty.

Another valuation metric, Tobin’s Q ratio, uses a company’s assets’ market value and replacement value to determine if a stock is over or undervalued. A ratio greater than one means the market values the company more than the value of its assets. Therefore, a high reading implies expectations for above-average earnings growth. As shown, in 1996, the ratio was slightly higher than the Nifty Fifty Bubble peak but below the 1929 peak.

Was Greenspan Prescient?

Greenspan had ample reason to worry with higher stock prices and valuations at levels seen near the tops of the last two stock booms. His warning caused the market to stutter for a few weeks before continuing its climb higher. Between December 5, 1996, and the bull market peak three years later, in 2000, the S&P more than doubled, and its valuations far exceeded the lofty levels of 1996.

Keep in mind that despite Greenspan’s weariness of market conditions, he cut rates by 75 basis points in late 1998 over concerns related to the Long Term Capital Hedge Fund bankruptcy. His actions further fueled the market significantly higher.

From the market peak in August of 2000 to its low in 2003, the S&P 500 erased a big chunk of the post “irrational exuberance” gains. Those highs would not be seen again until 2013.

Today’s Exuberance

The recent performance of the S&P 500 is like that of the mid to late 1990s. Similarly, current valuation metrics are at or above those Greenspan feared in 1996.

Today’s AI narrative mirrors the enthusiasm for the internet and technology forecasts of the mid- to late 1990s. Investors seem assured that AI will make the economy much more productive. Therefore, corporate profits will boom, and the economy will flourish. Those companies at the heart of AI, like Nvidia, Google, and Microsoft, will experience growth that dwarfs market averages. Or so we are told.

While the AI narrative sounds excellent, reality and narratives are often quite different. Despite the internet and technology boom of the late 1990s and beyond, the economic and corporate earnings growth rate did not increase. In fact, as shown below, the economy grew at an average rate of nearly 3% from 1975 to 1999. Since then, the average growth rate has been closer to 2%. 

Corporate earnings have followed a similar path despite the internet’s benefits.

Lessons From An Irrational Market

The market will likely correct meaningfully, and valuations will normalize. This time is not different.

However, the timing of a correction is far from known. Mr. Market doesn’t care what you, we, or the Fed Chairman think of valuations and prices. The market is bigger than all of us and can have a mind of its own. High valuations, even if in already record territory, can go higher.

The market can stay irrational longer than you can stay solvent. John Maynard Keynes

Some in the bearish camp advise taking our chips off the table and not trying to pick the top. That may be prescient. However, it may be years too early, like Greenspan’s irrational exuberance advice.

Walking the tightrope between irrational exuberance and reality is complex. Therefore, appreciate the market for what it is. This bull market has no known expiration date. Active management, using technical and fundamental analysis along with macroeconomic forecasting, is crucial to managing the potential risks and rewards that lie ahead.  

Summary

We leave you with a contrarian thought. What if we are experiencing rational exuberance and AI is an economic game changer? What if current valuations aptly reflect enhanced economic growth? Such profits and wealth formation may allow us to service unproductive debts better. Accordingly, today’s haunting macroeconomic issues may fade into a glorious future.

No one knows what the future holds. But, there are tools allowing us to maximize the upside better and limit the downside. With such potential returns and drawdowns lurking on the horizon, active management may likely prove to be the best way to manage your investments.

US equity futures slide with tech dragging down S&P and Nasdaq futures as both Semis and Mag7 are being sold pre-mkt with ASML -6% on a Bloomberg report the Biden administration is considering using the most severe restrictions available on companies like Tokyo Electron and European chip giant ASML (which tumbled to the lowest since early June), if companies continue to give China access to advanced semiconductor technology. As of 7:45am ET, S&P futures are down 1% and Nasdaq 100 futs tumble 1.4% with tech giants such as AAPL, NVDA, TSLA, AMD, MU, AVGO, MSFT, AMAT all down 1.4% – 4%. Meanwhile, the great rotation continues for another day with Russell futs positive. The yield curve is twisting flatter as 10-year Treasury yields rose while the dollar weakened and the yen jumps, sending the USDJPY lower as much as 200 pips to just above 156. Commodities are lower with Energy/Metals in the red though Ags are strong and WTI is flat. Today’s macro data focus is on Housing data, Industrial Production, and the Fed’s Beige Book. There are two Fed speakers and the 20Y bond auction which JPM rates strategist believe will require a concession.

In premarket trading, Nvidia, Advanced Micro Devices, Broadcom and other chipmakers lost more than 3% with Dutch chip giant ASML Holding plunging 7.5%, the most since 2022, even after the Dutch company reported strong orders in the second quarter, after Bloomberg reported that the Biden administration has told allies that it’s considering using the most severe trade restrictions available if companies continue giving China access to advanced chip technology. Nvidia is down 4%. Here are other notable premarket movers:

• Aehr Test Systems rises 11% after the maker of semiconductor test equipment gave a fiscal year revenue forecast that topped the average of two estimates available.
• American Airlines ticks 1% lower after TD Cowen stepped away from its buy rating, fretting over summer discounting.
• Bloom Energy gains 10% after the company said it will provide CoreWeave with power solutions for an AI data center.
• Five Below slides 15% after the discount retailer cut second-quarter earnings-per-share guidance and announced CEO Joel Anderson would step down.
• Gates Industrial rises 7% after the maker of power transmission equipment was included in the S&P Smallcap 600 Index.
• GitLab gains 15% after Reuters reported the software developer was exploring a sale after attracting interest from potential bidders.
• Spirit Airlines (SAVE) declines 6.3% after the low-cost carrier estimated that total revenue for the second quarter would be lower than previously expected mostly due to non-ticket revenue.

The Biden administration is considering using the most severe trade restrictions available if companies including ASML continue to give China access to advanced semiconductor technology, Bloomberg News reported on Wednesday. Meanwhile, an anti-China stance is also at the top of the agenda for Republican nominee Donald Trump who in an interview with Bloomberg questioned whether the US has a duty to defend Taiwan, a major chipmaking hub.

“Regardless of whether it’s a Democrat or Republican victory, there will always be a negative push toward China,” John Taylor, director of global multisector strategies at AllianceBernstein, said in an interview with Bloomberg TV. “One is more brazen and the other is more behind the scenes but the outcome is essentially the same.”

The move in stocks represents a small pullback after a stellar run of gains, fueled by soft inflation data and optimism that the Federal Reserve will cut interest rates. The S&P 500 closed at another all-time high on Tuesday, and in only five days, the Russell 2000 jumped almost 12% — hitting the most-overbought level since 2017.

“We had gotten a little too frothy,” said Tim Graf, head of EMEA macro strategy at State Street Global Markets. “Investors are underweight smalls, hugely overweight large caps and rotating a bit.”

European stocks slumped for a third day as the start of the second-quarter earnings season failed to revive investor optimism and trade tensions between the US and China over semiconductors weighed on sentiment. The Stoxx Europe 600 fell 0.8% and was trading at session lows as technology stocks led the drop, with ASML Holding NV slumping as much as 7.7% after Bloomberg News reported that the Biden administration is mulling more severe measures to restrict the company’s exports to China. ASM International and BE Semiconductors also fell more than 2.5%.  Adidas AG gained 5% after raising its annual profit target for the second time in three months. Roche Holding AG jumped on promising early-stage study results for a weight-loss pill. Here are the most notable European movers:

• Adidas shares jump as much as 5.1% in Frankfurt after the sportswear maker reported preliminary second-quarter revenue that topped consensus expectations, and boosted its full-year sales growth and operating profit forecasts.
• Accelleron shares jump as much as 9.4% to a record after the Swiss engine parts maker increased its revenue and margin forecast for the year.
• Barco shares rise as much as 9.4% as investors looked past weaker-than-expected earnings at the electronic components company and focused on its projection for a second-half recovery.
• Handelsbanken advanced as much as 8.3%, most since March 2020, after Sweden’s largest property lender reported better-than-expected revenues, with higher fees and net interest income that helped offset increased costs.
• Roche shares jump as much as 7.4%, the most since March 2020, after the Swiss drugmaker said an early-stage study of its experimental pill showed meaningful weight reduction in patients with obesity.
• ASML shares decline 7.7%, the most since Oct. 2022, after Bloomberg reported that the Biden administration is mulling more severe measures to restrict the company’s exports to China.
• Demant shares slump as much as 14% as the Danish hearing-aids group warned on its full-year growth after preliminary second-quarter results missed expectations.
• Nel shares fell as much as 10%, the most since May 30 after the Norwegian hydrogen technology firm reported slower revenues than consensus, as well as worse cash burn than expected, according to Citigroup.
• Genus shares drop as much as 8.6% after the company warned profits from its cattle-breeding arm ABS will be lower than previously expected in FY25 due to weak demand in several countries, including China and Brazil.
• Scandic falls as much as 7%, the most since February, after the Nordic hotel chain reported second-quarter sales slightly below expectations.
• EssilorLuxottica shares drop as much as 4.4% to a five-month low after the luxury eyewear maker struck a deal to acquire the Supreme brand from VF for $1.5 billion in cash.

Earlier, Asian stocks rose, on course to snap a three-day losing streak, as global bets on Federal Reserve rate cuts increased while the market awaited more details from a key Chinese policy meeting. The MSCI Asia Pacific Index rose as much as 0.6%, with health-care and industrials the biggest boosts as tech stocks declined. Benchmarks climbed in Australia and New Zealand, while equities fell in South Korea and Taiwan and were mixed in Japan. Stocks fluctuated in Hong Kong and mainland China as sentiment remained fragile amid tougher rhetoric from the Biden administration and Trump’s campaign. Traders are focusing on the Third Plenum ending Thursday, in which top leaders will unveil the long-term development agenda for the world’s second-largest economy. Asian equity market performance is “a mixed bag,” said Homin Lee, senior macro strategist at Lombard Odier Singapore. “Investors are in a waiting mode ahead of China’s Third Plenum and also the conclusion of the Republican National Convention where Trump could provide more concrete details on his governing agenda.”

In FX, the dollar fell as traders dissected Donald Trump’s views on FX; the pound topped $1.30 as traders pared bets on an interest-rate cut in August after stickier-than-expected inflation data. The yen rallied 1% against the dollar, reducing the need for Japanese authorities to step into the market again. In his interview, Trump also said the strength of the dollar has been hurting the competitiveness of US exports and pointing to the weakness of yen and yuan; that’s raised some speculation among strategists that he might adopt policies to reduce the value of the greenback if he takes office. Both currencies rose, with the yen climbing to 156.46 versus the greenback, outperforming major currencies, while the offshore Chinese renminbi broke through the 50 day moving average to 7.2640 per dollar.

“The one thing that China and Japan and other Asian currencies are worried about is getting a tariff target on their back,” Mark McCormick, global head of currency and emerging market strategy at TD Bank, said in an interview with Bloomberg TV. “These currencies should be stronger.”

In rates, treasuries bear-flatten as front-end yields rise around 4bp on the day with long-end little changed vs Tuesday’s close. The Treasury yield curve extends Tuesday’s flattening move, tightening 2s10s and 5s30s spreads by ~3bp. The 10-year TSY yield is around 4.17% is ~2bp higher on the day with UK 10-year cheaper by an additional 1.5bp after UK inflation came in hotter than expected. Gilts lag slightly after UK inflation data pointed to stubborn underlying price pressures and swaps traders priced in less monetary easing by the Bank of England. With higher front-end yields, some Fed easing premium leaves the market, though around 62bp by December remains priced in vs 65bp at Tuesday’s  close. Treasury coupon issuance resumes with $13b 20-year reopening at 1pm; WI 20-year yield at ~4.475% is ~2bp cheaper than last month’s auction.

In commodities, crude futures were steady. Spot gold was little changed at $2,471/oz. Bitcoin climbed above $65,000.

Looking at today’s calendar, US economic data slate includes June housing starts (8:30am) and industrial production (9:15am). Fed members scheduled to speak include Barkin (9am) and Waller (9:35am). Fed releases latest Beige book at 2pm.

Market Snapshot

• S&P 500 futures down 0.8% to 5,671.50
• STOXX Europe 600 down 0.6% to 514.37
• MXAP up 0.4% to 187.66
• MXAPJ little changed at 581.85
• Nikkei down 0.4% to 41,097.69
• Topix up 0.4% to 2,915.21
• Hang Seng Index little changed at 17,739.41
• Shanghai Composite down 0.5% to 2,962.86
• Sensex little changed at 80,716.55
• Australia S&P/ASX 200 up 0.7% to 8,057.90
• Kospi down 0.8% to 2,843.29
• German 10Y yield little changed at 2.41%
• Euro up 0.2% to $1.0916
• Brent Futures up 0.3% to $83.97/bbl
• Gold spot up 0.2% to $2,474.38
• US Dollar Index down 0.31% to 103.94

Top Overnight News

• The US is said to be considering its most severe trade restrictions yet on China’s chips access. The Biden administration told allies it may impose controls on foreign-made products that use American technology, if companies continue to allow China to access advanced technology. BBG
• ASML shares dropped the most since October 2022 on the risk of tougher trade curbs. Its orders outlook for the third quarter missed estimates, while second-quarter bookings beat. Tokyo Electron fell the most in three months. BBG
• Fed’s Williams (voter) says the Fed is closer but not ready to cut; a rate cut will be appropriate in the coming months; more data will help provide confidence on inflation; seeing broad-based declines in inflation: WSJ.
• US President Biden is set to announce support for major Supreme Court changes, while proposals could include term limits and an enforceable ethics code: Washington Post.
• Former US President Trump said “Trumponomics” equates to low interest rates and tariffs, while he said he would not seek to remove Fed Chair Powell before his term ends and would consider JPMorgan CEO Dimon to serve as Treasury Secretary. Furthermore, he said the Fed should abstain from cutting rates before the November election and wants to bring the corporate tax rate to as low as 15%: Bloomberg Businessweek interview.
• UK CPI runs slightly hot in June, coming in +2% headline (vs. the Street +1.9% and vs. +2% in May), +3.5% core (vs. the Street +3.4% and vs. +3.5% in May), and +5.7% services (vs. the Street +5.6% and vs. +5.7% in May). RTRS  
• Bank of America is putting more money and balance-sheet resources behind its trading business, according to Chief Executive Officer Brian Moynihan. “You are seeing much more stability” in sales and trading, with back-to-back quarters of more than $1 billion in profit, Moynihan.  “We will keep giving them more — risk-weighted assets, balance sheet, capital and investments in technology — because that is obviously a very expensive business to run from a day-to-day basis,” Moynihan said. BBG
• Donald Trump said he’d allow Jerome Powell to serve out his term if he wins the election, and warned the Fed shouldn’t cut rates before November. In a Businessweek interview conducted in late June, he also said he’d bring the corporate tax rate to as low as 15% and consider JPMorgan’s Jamie Dimon for Treasury secretary, and was cool to the idea of defending Taiwan from Chinese aggression. BBG
• Atlas Capital Group secured a construction loan worth nearly $1B to build a pair of residential towers in downtown NYC, the largest such deal in the city since COVID. NY Post
• Fundraising groups aligned with Donald Trump raised more than $400mn for his presidential election campaign between April and June — a record second-quarter haul that almost matches the sums raised during his entire 2016 campaign. FT
• Amazon’s advertising portal for merchants briefly crashed, disrupting Prime Day. Sales climbed almost 12% in the first seven hours of the event versus last year, according to Momentum Commerce. BBG
• Five Below issued a downside preannouncement (it sees Q2 comps down 6-7% vs. the Street -4.6% w/EPS of 53-56c vs. the Street 63c) and says its CEO is stepping down. RTRS

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mixed despite the positive handover from Wall St where the S&P 500 and DJIA extended to fresh record highs following better-than-expected Retail Sales data, as China trade frictions and tariff threats clouded over Asia-Pac sentiment. ASX 200 gained with notable strength in gold-related stocks after the precious metal rose to a fresh record level, while the mining sector is positive but with upside capped amid indecision in BHP despite posting better-than-expected quarterly iron ore output. Nikkei 225 gradually reversed its initial advances with trade restrained by a lack of drivers and a quiet calendar aside from the monthly Reuters Tankan survey which showed an improvement in large manufacturers’ sentiment. Hang Seng and Shanghai Comp. were lacklustre amid tariff fears and trade frictions after Trump suggested 60%-100% tariffs on China, while the Biden administration is to issue a proposed rule on Chinese connected vehicles in about a month and warned allies of stricter trade rules in the China chip crackdown.

Top Asian News

• PBoC reportedly questions banks on bond holdings in a push to cool the rally, according to Bloomberg.
• US reportedly warned allies of stricter trade rules in the China chip crackdown with the US mulling whether to impose the Foreign Direct Product Rule, while US restriction would hit technology from Tokyo Electron (8035 JT) and ASML (ASML NA), according to Bloomberg.
• Former US President Trump said he no longer plans to ban TikTok, while he wants new tariffs for China of between 60%-100% and would impose a 10% tariff on imports from other countries, according to a Bloomberg interview.
• Japan’s Outgoing Top Currency Diplomat Kanda says will respond appropriately to excessive FX moves, via Kyodo; if speculators cause excessive moves, “we have no choice but to respond appropriately”. In close contact with other countries’ authorities, there has been no criticism.
• Traders suspect Japanese intervention could be behind the surge in JPY, according to Reuters

European bourses, Stoxx 600 (-0.5%) are almost entirely in the red, with sentiment hit after ASML (-6.6%) reported Q2 earnings, which has significantly weighed on the AEX (-0.9%) and more notably on the tech-heavy NQ. Updates from Maersk also factor, Co. noted that Red Sea disruptions have extended beyond far-east Europe. European sectors hold a strong negative bias, with Tech the clear underperformer, dragged down by ASML weakness. Consumer Products were initially the best-performing sector, propped up by post-earning gains in Adidas; but the sector is now flat. US Equity Futures (ES -0.7%, NQ -1.3%, RTY U/C) are entirely in the red, with clear underperformance in the tech-heavy NQ, in reaction to the ASML results; Nvidia (-3.1%), AMD (-3%), Broadcom (-3.1%). The RTY remains fairly resilient to the selling pressure.

Top European News

• ASML (ASML NA) – Q2 (EUR): Revenue 6.24bln (exp. 6.03bln), Net Income 1.58bln (exp. 1.44bln), Bookings 5.57bln (exp. 4.41bln), EPS 4.01 (exp. 3.68). Q3 Outlook Revenue 6.7-7.3bln (exp. 7.66bln). CEO: currently see strong developments in AI, driving most of the industry recovery and growth, ahead of other market segments.
• Maersk (MAERSKB DC) said the Red Sea disruptions have extended beyond far-east Europe routes to the entire ocean network; Asian exports are more impacted than Asian imports by the ongoing situation in the Red Sea

FX

• DXY is firmly below 104 and at its lowest level since 21st March with the USD hit by a combination of strength in low yielders as carry trades are unwound and a strong NZD and GBP post-CPI. Thereafter, commentary from Fed’s Williams who noted the “Fed is closer but not ready to cut”, helped to prop up DXY from a 103.67 base.
• EUR/USD is lifted by the pull back in the USD with the dollar very much the dominant force for the pair. EZ fundamentals are lacking ahead of tomorrow’s ECB; EUR/USD has been as high as 1.0944; next target is the March 14th peak at 1.0954.
• GBP is firmer in the wake of UK inflation data which came in above expectations**; services inflation is markedly above the MPC’s expectation. Cable above 1.30 for the first time since July 19th.
• JPY is the best performer across the majors with USD/JPY now down as low as 156.11 vs. the session high at 158.61. This follows on from a broader move triggered last week by comments from Powell, soft US CPI and Japanese intervention. Some desks are attributing today’s aggressive price action to a reassessment of the JPY’s role as a funding currency alongside the pullback in US yields, which could also have broader implications for high yielders; whilst Reuters suggests intervention could be playing a role.
• NZD performing well despite a miss on both QQ and YY headline inflation with some desks noting the strength in non-tradeable inflation. After an initial dip to a multi-month low at 0.6041, the pair has managed to eclipse yesterday’s 0.6079 high.
• USD/CHF has slipped today to 0.8875, in fitting with the broader unwind of carry trades.
• PBoC set USD/CNY mid-point at 7.1318 vs exp. 7.2630 (prev. 7.1328).

Fixed Income

• USTs are directionally in-fitting with peers but with magnitudes more contained so far, holding just below Wednesday’s 111-13+ peak having been within half a tick overnight and around three shy in the European morning. A modest hawkish reaction was seen following commentary from Fed’s Williams, who noted that “the Fed is closer but not ready to cut”.
• Bunds saw two way action on the UK CPI (more below) but was ultimately softer and printed a 132.35 base, around 14 ticks below opening levels. Thereafter, a deterioration in the broader risk tone was seen and potentially driven by ASML (strong numbers, however Q3 guidance soft & China exposure), Trump tariff talk overnight and an update from Maersk around increasing Red Sea disruptions.
• An essentially unchanged open for Gilts after a sticky UK CPI release. Data which lessens but does not entirely remove the possibility of an August cut; a narrative which, alongside participants waiting for Thursday’s wages. 2029 DMO tap was robust, but not quite as strong as the prior tap, which briefly weighed on Gilts by a couple of ticks.
• UK sells GBP 4bln 4.125% 2029 Gilt: b/c 3.1x (prev. 3.59x), average yield 4.023% (prev. 4.083%), tail 0.9bps (prev. 0.3bps)
• Germany sells EUR 0.824bln vs exp. EUR 1bln 2.50% 2054 Bund and EUR 0.808bln vs exp. EUR 1.5bln 0.00% 2052 Bund.

Commodities

• Initially firmer but then reversed amid the broader risk aversion, though the initial upside were seemingly as a function of the weaker Dollar coupled with the heightened geopolitical landscape after Former President Trump flagged a hawkish policy towards China. Brent September currently holds around USD 83.60/bbl.
• Mixed trade across precious metals with outperformance seen in spot palladium while spot silver is the clear laggard. Spot gold ekes mild gains following yesterday’s rise to fresh ATHs at USD 2,482.42/oz as the yellow metal zeros in on USD 2,500/oz.
• Base metals trade mostly firmer despite the broader risk aversion following back-to-back sessions of losses amid China woes earlier in the week. In more recent trade, the complex is seemingly propped up by the softer Dollar.
• US Private Inventory Data (bbls): Crude -4.4mln (exp. +1mln), Distillate +4.9mln (exp. -0.5mln), Gasoline +0.4mln (exp. -1.7mln), Cushing -0.7mln.
• Russia plans to make extra crude production cuts to compensate for pumping above its OPEC+ quota in the warm seasons of this year and next, according to Bloomberg sources.
• Antofagasta (ANTO LN) Q2’24 Production report: quarterly production +20%, FY production exp. in lower end of guidance range of 670-710k tonnes. Gold Production 33,600 ounces.

Geopolitics: Middle East

• Israeli media reported more than 80 rockets were fired from Lebanon on Tuesday night, according to Sky News Arabia.
• Lebanon’s Hezbollah chief says Israel persistence in targeting civilians will push Lebanon to target “new colonies” that were not previously targeted.

Geopolitics: Other

• Russian Deputy PM Novak says the latest EU sanctions targeting Russia’s LNG industry are illegal, according to TASS.
• Hungarian Foreign Minister said efforts are being made to hold a second peace conference on Ukraine this year, according to RIA.
• Japan is making the final arrangement to contribute USD 3.3bln to Ukraine aid using frozen Russian assets which is about 6% of the total G7 package, according to Kyodo.
• Former US President Trump said Taiwan should pay the US for protection from China and that he is at best lukewarm about standing up to Chinese aggression, according to a Bloomberg interview. It was later reported that Taiwan’s Premier said regarding the Trump interview that the relationship between Taiwan and the US is very firm, while he added that peace and stability of the Taiwan Strait and the Indo-Pacific region are our common responsibility and that Taiwan is willing to take on more responsibility.

US Event Calendar

• 07:00: July MBA Mortgage Applications 3.9%, prior -0.2%
• 08:30: June Housing Starts, est. 1.3m, prior 1.28m
  • June Building Permits, est. 1.4m, prior 1.39m, revised 1.4m
• 09:15: June Capacity Utilization, est. 78.4%, prior 78.7%, revised 78.2%
  • June Manufacturing (SIC) Production, est. 0.1%, prior 0.9%
  • June Industrial Production MoM, est. 0.3%, prior 0.9%, revised 0.7%
• 14:00: Federal Reserve Releases Beige Book

DB’s Jim Reid concludes the overnight wrap

Rotation is the key word in financial markets at the moment as the leadership of the US market has very rapidly shifted away from the Mag-7 to the wider market. This trend is only a few days old but so far its been done without any damage to the overall market as last night the S&P 500 (+0.64%) closed at its 38th all-time high of 2024 so far, having now risen for 10 of the last 11 sessions. A further rise today would be the first 11 out of 12 run since April 2019. Zooming out the S&P 500 has risen for 28 out of the last 37 weeks, the best such streak in 35 years.

The small-cap Russell 2000 (+3.50%) reached another two-and-a-half year high, with a massive +11.54% increase seen over the last week alone, its largest 5-day gain since April 2020. This strength has been spread across many sectors, including those that have struggled in recent times, with the KBW Regional Banking Index up +14.88% in the last week alone. In this period the Mag-7 is down -2.68% and was -0.43% lower yesterday. The YTD price outperformance of the Mag-7 versus the Russell 2000 has thus narrowed from nearly 50pp a week ago (+49% vs 0% respectively) to about 33pp now (+45% vs +12%).

The equal-weighted S&P 500 (+1.74%) also closed at an all-time high last night, surpassing its previous record back in March and marking its best 5-day outperformance over the market-cap weighted S&P 500 since 2020. Our CoTD on Friday (link here) looked at how unloved sectors can rocket once a rotation away from tech occurs and yesterday’s (link here) looked at the stretched positioning for Mega Cap Growth and Tech versus the rest and plotted this against earnings growth. Our strategists think the earnings gap will narrow sharply into year-end which will influence the respective positioning. So rotation is indeed the word du jour. Yesterday did show that overall markets have to be slightly careful of the rotation trade as heavyweights Nvidia (-1.62%), Microsoft (-0.98%), Meta (-1.28%) and Alphabet (-1.40%) were all notably lower. For now having 446 S&P 500 advancers on the session meant that these losses could be absorbed.

For the most part, sentiment was supported by the retail sales data, which showed headline retail sales were unchanged in June (vs. -0.3% expected). The details were also pretty good, as the measure excluding autos had its fastest growth in 3 months at +0.4% (vs. +0.1% expected), and there were positive revisions to the May number as well. In turn, that led to growing optimism about the Q2 GDP release next week, and the Atlanta Fed’s GDPNow estimate now sees growth coming in at an annualised rate of +2.5%. It got as low as +1.5% on July 3.

Admittedly, that strength in retail sales did work against the other main theme at the moment, which is the growing anticipation about rate cuts. But ultimately, near-term expectations for rate cuts didn’t shift too much, as the positive retail sales data wasn’t enough to push back against the other data over recent weeks, and futures are still fully pricing in a rate cut by the Fed’s September meeting. Those expectations for rate cuts got some support yesterday from commodity price moves, with Brent crude oil prices (-1.28%) falling back to a one-month low of $83.76/bbl. In addition, Canada’s CPI also surprised on the downside in June, coming in at +2.7% (vs. +2.8% expected).

Altogether a lower yield narrative dominated, as 1 0yr US yields (-7.1bps to 4.16%) closed at their lowest level in 4 months with a temporary 4bps intra-day sell-off after retail sales not holding. And 2yr yields fell to a 5-month low (-4.1bps to 4.42%). The rally in Treasuries was helped along by dovish-leaning comments from Fed Governor Kugler who said that “continued rebalancing [in the labour market] suggests that inflation will continue to move down toward our 2% target”. Meanwhile, with the strong US data doing little to damage rate cut hopes, gold prices (+1.19%) also closed at an all-time nominal high of $2,459/oz.

Overnight a Bloomberg interview with Trump has come out with the former President highlighting that he would allow Powell to serve out his term as Fed Chair (until 2026) and that he believes tariffs are great economically and great as a negotiating tool with other countries.

Back to markets and sovereign bonds also rallied in Europe yesterday, with attention now increasingly shifting to the ECB’s decision tomorrow, and yields on 10yr bunds (-4.6bps), OATs (-3.2bps) and BTPs (-4.7bps) all fell back. However, there were fresh losses for European equities, with the STOXX 600 (-0.28%), the DAX (-0.39%) and the CAC 40 (-0.69%) all losing ground for a second day running.

This morning in Asia equity markets are mostly trading lower with the Shanghai Composite (-0.45%), the CSI (-0.20%) and the Hang Seng (-0.10%) all dipping. Elsewhere, the KOSPI (-0.22%) is also losing ground while the Nikkei (+0.08%) is trading just above flat. Meanwhile, the S&P/ASX 200 (+0.98%) is notably outperforming reaching an all-time high. S&P 500 (-0.13%) and NASDAQ 100 (-0.26%) futures are pausing for breath in Asia hours and Treasury yields have edged up a bit.

Early morning data showed that New Zealand’s Q2 CPI rose +3.3% y/y against +3.4% expected and slowing from the prior quarter’s +4.0%.

Looking forward, attention will be on the UK today, as the CPI release is coming out shortly after we go to press. That’s an important one for the Bank of England, as current market pricing is saying there’s a 49% chance of a rate cut at the next meeting, so this could well be an important piece of data in tilting that balance either way. Elsewhere in the UK, we’ve also got the State Opening of Parliament happening today, where the King’s Speech will outline the new government’s legislative agenda for the upcoming parliamentary session.

Otherwise, the IMF updated their growth forecasts yesterday, which painted a broadly similar picture for the global economy relative to three months ago. For this year, they still see global growth at +3.2%, and the 2025 number was revised up a tenth to +3.3%. That said, there were some bigger moves at the country level, and several emerging markets saw decent upgrades. That included China, where growth in both 2024 and 2025 was revised up four-tenths, and they now forecast growth of +5.0% in 2024 and +4.5% in 2025. India’s growth was also revised up two-tenths this year to +7.0%.

Finally on yesterday’s other data, the German ZEW survey came in a bit stronger than expected in July, with the current situation up to a one-year high of -68.9 (vs. -74.8 expected). However, the expectations component did fall to 41.8 (vs. 41.0 expected), which ended a run of 11 consecutive monthly gains. Meanwhile in the US, the NAHB’s housing market index fell to a seven-month low of 42 in July (vs. 43 expected).

To the day ahead now, and data releases include the UK CPI print for June, US industrial production, capacity utilisation, housing starts and building permits for June. From central banks, we’ll hear from the Fed’s Barkin and Waller, and the Fed will also be releasing their Beige Book. Finally in the political sphere, the King’s Speech is taking place in the UK, where the government will announce their legislative agenda.

The Biden administration is considering imposing the strictest trade restrictions available if companies like Tokyo Electron and ASML Holding continue providing China with advanced semiconductor technology, according to a Bloomberg News report. This headline sparked risk-off sentiment across Japan, Europe, and the US markets. 

Seeking leverage with allies, the US is mulling whether to impose a measure called the foreign direct product rule, or FDPR, said people familiar with recent discussions. -BBG

FDPR was first introduced in the late 1950s to regulate the transfer of foreign-made products utilizing US technology, software, or equipment. The rule gives the Department of Commerce’s Bureau of Industry and Security the power to control the reexport and transfer of these items.

“Such a step — seen by allies as draconian — would be used to clamp down on business in China by Japan’s Tokyo Electron and the Netherlands’ ASML, which make chipmaking machinery that’s vital to the industry,” Bloomberg said, adding, sources said US officials are currently talking with their counterparts in Hague and Tokyo about FDPR maneuvers. 

In markets, chip stocks tumbled, with Nikkei heavyweight Tokyo Electron sinking 7.5%. Even earnings from the Dutch semiconductor ASML were not enough to reverse losses, down 8%, sending tech shares lower across Europe. 

In the US, Nvidia was down 4%, Advanced Micro Devices and Broadcom lost more than 3%, Apple 2%, and Intel half a percent in premarket trading. 

According to analysts, the news overshadowed ASML’s better-than-expected orders in the second quarter, which had bolstered confidence that the firm’s upper end of its 2025 sales guidance is attainable. Citi and JPMorgan noted that a high proportion of bookings recorded by logic customers suggests that TSMC is likely to place more orders.

Citi analyst Andrew Gardiner told clients, “The geopolitical angle, however, is likely to be in more focus today than results, with Bloomberg reporting the US is pressing for additional restrictions on ASML,” adding, “Pressure is building to restrict service activity on the installed base.”

Shares of ASML tumble to a near two month low. 

This comes as price momentum in the MSCI World Semiconductor and Semiconductor Equity Group Index has stalled since mid-June. 

Here’s more from Bloomberg: 

The administration is in a tenuous position. US companies feel that restrictions on exports to China have unfairly punished them and are pushing for changes. Allies, meanwhile, see little reason to alter their policies when the US presidential election is just a few months away.

The goal is to persuade allies, who have already restricted some shipments of key equipment, to limit their companies’ ability to service and repair restricted gear that’s already in China — which US firms are barred from doing. The US is also weighing additional sanctions on specific Chinese chip companies, Bloomberg reported earlier.

Chinese Foreign Ministry spokesman Lin Jian responded to the report at a regular press briefing in Beijing, indicating that the US “politicized trade and the concept of national security.”

Meanwhile, the three largest US chip equipment manufacturers—Lam Research, Applied Materials, and KLA—have expressed deep concerns with US officials that current restrictive trade policies are backfiring. According to sources citing the US chip firms, these policies harm American semiconductor companies while failing to stop China’s technological advancements.