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Boom Lifts Bond Yields
I. Stocks, Bonds & Waller Today, the S&P 500 had its best day in a month as Treasury yields edged lower and the dollar dropped to its lowest level since May. The policy-sensitive 2-year Treasury yield retreated to 4.34% after briefly rising to 4.41% on Tuesday. These moves reflect a decline in the probability of a September rate hike to about 50%, down from 70% earlier this week. The catalyst was comments from Fed Governor Christopher Waller. While he said he's willing to hold the policy rate steady if progress toward the Fed's 2% inflation target continues, he also stressed that it would not take much evidence of persistent inflation pressures to support a hike. With recent data showing "some signs of disinflation," the burden of proof is now on the inflation data to justify a hike. The financial markets concluded that Waller is an owl, i.e., an FOMC voter watching incoming inflation data before deciding whether to vote for a hike at the Committee's September 15-16 meeting. We reckon that of the 12 voters on the FOMC, five are hawks (i.e., ready to hike), while six are owls. That's why bonds and stocks rallied today when Waller joined the latter birdies. They also rallied today because the yen rebounded, without any intervention by the Bank of Japan, on expectations that the central bank will soon raise its policy rate and on second thoughts about a Fed rate hike (chart). The good news is that stocks should do well, as Fabulous Earnings Momentum (FEMO) reported by Broadcom, Dell, and Snowflake continues to support the bull market. Our two favorite bull-bear ratios remain relatively neutral, providing neither a strong buy nor sell signal (chart). FEMO, however, is sending a loud buy signal! II. GDP & Bonds Earnings are strong because the economy is booming. The Atlanta Fed's GDPNow model is projecting real GDP growth of 4.7% (saar) in Q3 (chart). Consumer spending is expected to rise 3.8%, while AI-driven business investment remains strong, with equipment spending projected to increase 18.3% and intellectual property investment 6.8%. Final sales to private domestic purchasers are running at 4.6%. That's impressive, given that the trade deficit has widened as US imports of computer hardware, components, and accessories soar amid the AI building boom (chart). The Weekly Economic Index (WEI) rose to 3.1% in the week of August 28, its highest reading since early July (chart). The index combines 10 measures of consumer activity, labor markets, and production. It is scaled to real GDP growth and reinforces the Atlanta Fed's strong readings. The recent increase in the 10-year TIPS yield has closely tracked the Weekly Economic Index, suggesting that higher Treasury yields reflect stronger economic fundamentals, not bond vigilantism (chart). III. NM-PMI The service sector continues to expand at a solid pace. The ISM NM-PMI rose 1.3 points to 55.4 in August, its highest reading since February (chart). All major components except employment remain in expansion territory, i.e., greater than 50.0. New orders growth accelerated to the fastest pace since early 2023, while a measure of business activity was the strongest since 2022 (chart). The August ISM PMI surveys suggest both manufacturing and services remain in good shape. Services continued to lead, with stronger business activity and new orders, while manufacturing stayed firmly in expansion territory with a PMI of 54.6 (chart). Prices paid remained elevated in both sectors, while growing backlogs and export orders suggest economic growth remains broad-based. IV. Inflation Meanwhile, inflation remains an issue. Prices-paid indexes stayed elevated in August, with the services measure jumping to 72.6, its highest reading since August 2022 (chart). The jump in the services prices-paid index should warn the Fed, as the index has historically led headline PCED inflation (including goods and services) by about three months (chart). Furthermore, the prices-paid and prices-received averages from the regional Fed surveys have eased from recent highs but remain well above levels consistent with the Fed's 2% inflation target (chart). Historically, both have tracked core PCED inflation closely. V. Labor Market The labor market data continue to confirm our view that the labor market remains well balanced at full employment, giving the Fed room to focus primarily on the inflation side of its dual mandate. The average of the ISM manufacturing and services employment indexes is lackluster because companies are boosting their productivity to offset labor shortages (chart). Additionally, layoffs remain remarkably subdued. Announced job cuts during the first eight months of 2026 were the lowest in four years, according to Challenger, Gray & Christmas (chart). Initial claims tell the same story, remaining historically low at 206,000 in the week of August 28 (chart). Meanwhile, continuing claims have resumed their recent downward trend.
On Housing, Technology & mRNA’s Potential
The rising mortgage rate isn’t good news for a housing market that’s already in the dumps. The only positive news is that the market may be slowly adjusting, with builders starting construction on fewer new homes and cutting prices, Jackie reports. ... She also takes a look at one of Australia’s neoclouds, which is being helped by the country’s new regulations and ample funding from Nvidia and others. ... And: The news that Moderna’s mRNA treatment of melanoma was successful in Phase 3 trials gave many patients hope. We look at how Moderna and other companies aim to use mRNA to treat more cancers and diseases.
Dell Results Suggest AI Productivity Boom Is Here
I. Dell Dell Technologies' stock price is soaring (chart). The company delivered a major beat across the board for its fiscal 2027 second quarter (ended July 31), driven by massive, accelerating demand for AI infrastructure and strong legacy hardware performance. Revenues and earnings rose 58% y/y and 203%, respectively. AI server revenue rose 100%, while traditional servers and networking revenues rose 122%. The results confirm that the AI infrastructure buildout remains in full swing. Strong demand for AI compute capacity points to accelerating AI adoption across the economy, which we think will drive a productivity boom. II. Productivity We are already seeing signs of this productivity boom in the economic data. The Atlanta Fed's GDPNow model currently estimates that real GDP is increasing by 4.8% (saar) in Q3, led by a whopping 21.5% increase in AI-supercharged fixed business equipment investment (chart). Output is booming, while labor input is rising at an anemic pace, a clear sign of robust productivity growth (chart). Job growth remains modest relative to the economy's rate of expansion. ADP reported a gain of just 38,000 jobs in August, following a gain of 46,000 in July (chart). Small monthly job gains reflect a declining labor force (chart). That means fewer jobs need to be created to maintain a stable unemployment rate, currently at 4.1% and consistent with full employment. Productivity growth has rebounded since it last bottomed in Q2-2017 at 0.85%, based on the annualized average of its seven-year growth rates (chart). It rose to 2.4% during Q2-2026, slightly exceeding its historical average of 2.3%. We predict that this growth rate will rise to 3.0%-4.0% by the end of the decade. III. The FOMC & Inflation Fed officials are also taking note of the AI-driven investment boom. Today, New York Fed President John Williams said in a CNBC interview that rising Treasury yields are driven by "a strong US economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general." His comments are consistent with our view that bond yields reflect strong nominal GDP growth. On monetary policy, Williams said there are "no clear signs right now" whether current policy is sufficient to return inflation to target. Yesterday, Fed Governor Michael Barr said he would support a hike only if inflation fails to moderate further. In other words, incoming inflation data bears the burden of proof. If progress toward the Fed's 2% inflation target stalls, a majority of the FOMC is likely to vote to raise the federal funds rate in September. (1) CPI vs PCED. Inconveniently, core CPI and core PCED inflation rates are telling different stories. The former was 2.5% in July and has been falling toward 2.0% in recent months, while the latter was 3.3% in July and has been heading higher (chart). The -0.9ppt gap between them is now the most negative since the 1980s (chart). The average spread over time is +0.5ppt! The FOMC meets on September 15-16. August's CPI will be released on Friday, September 11. The Cleveland Fed's reliable Inflation Nowcasting model predicts that the core CPI will be up 0.2% m/m and 2.4% y/y. August's PCED comes out September 30, after the FOMC meets. Core PCED is predicted to rise 0.27% m/m and 3.4% y/y, a full percentage point more than the core CPI and still above 3.0%! We presume that Fed officials are aware of this divergence and won't be lulled into voting against a rate hike by a cool CPI, knowing that the PCED will be hotter. One source of the divergence is that Computer Software & Accessories has a weight of only 0.027% in the CPI, but 1.20% in the PCED. This component rose a whopping 21.2% y/y during July (chart). (2) Food Inflation. We are also starting to monitor food inflation closely. It could become a more meaningful source of inflationary pressure in the months ahead (chart). That's because grain prices are surging (chart). Wheat and corn prices recently reached their highest levels in more than three years amid Black Sea supply disruptions, adverse weather, and higher fuel and fertilizer costs. Because these commodities sit at the heart of the food supply chain, the impact is likely to filter through to consumer food prices with a lag.
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