Inflation

It seems nearly everyone has something to add to the discussion concerning inflation these days, so who should we listen to? The CEO at Walmart, Doug McMillon, might be a good start. After reporting this week, he dropped this beauty:

“OUR COST INCREASE EACH WEEK AS WE REPLENISH INVENTORY AT POST-TARIFF PRICE LEVELS – EXPECT TARIFF-RELATED COST TO INCREASE INTO Q3 AND Q4”

So, costs are going up for nearly everybody , and Walmart and other businesses probably won’t be absorbing the majority of  them much longer according to GS:

But the Federal Reserve Bank of Atlanta might beg to differ. According to them, firms have more reason to get the inflation call right. Business inflation expectations continue to improve, according to data from the Atlanta Fed. In August, the median expected change to unit costs over the next 12 months slid for the 4th consecutive month to 2.2%, the lowest since January. 

Maybe the reason they believe Unit costs are headed lower is because the consumer is simply not consuming like they have been?

According to the St. Louis Fed, Real Final Sales to private domestic purchasers are already slowing.

We think it all comes down to how you view the following chart.

(Un)Employment

It appears finding a job for people fresh out of college is becoming much tougher. We have seen multiple articles pop up pertaining to this issue. The chart we saw this week that best characterizes this is the following:

The 3-month average youth underemployment rate jumped to 17% in July, the highest since 2020. This metric includes unemployed individuals aged 16–24. Now, the youth underemployment rate has climbed by ~5 percentage points over the last 2 years. This is nearly in line with the peak during the 2001 recession and the early stages of the 2008 Financial Crisis. This also signals the US labor market could weaken further, with young workers typically the first to feel the impact when the economy turns. The job market is rapidly deteriorating.

Wage growth seems to be supporting the thesis as well.

Signs that labor market conditions continue to cool off. In July, the Indeed Wage Growth Tracker slowed to 2.4% in July, the weakest in five years. Wage growth in job postings tends to lead actual wage and salary growth.

GS also chimes in that further revisions will be forthcoming:

If jobs are becoming a little tougher to come by, it would make sense that these might start to rise?

Weightings

Excessive market cap weightings have garnered a fair amount of publicity recently, especially the outsized few.

This chart really helps put into perspective how managed funds are actively choosing to ignore the actual weighting in the S&P 500.

Nvidia’s institutional ownership ended Q2 at 2.41% below its S&P 500 weight — the sharpest underweighting among mega-cap tech, per Morgan Stanley’s 13F analysis. Only Microsoft $MSFT in Q2 2024 was more under-owned over the last 16 years. Mega-cap tech overall is the most under-owned vs. the index since 2009.  

The top 7 dark blue diamonds are way out ahead of those red ones, makes one wonder what happens if the Index itself continues to drive higher led by the biggest weightings?

Especially after a valuation discount seems to have just been applied.

Japanese Yields We have noticed more than a few references to the breakout of Japanese TSY yields, specifically the 30- year.

New ATH today.

Should we worry about a residual impact to the US 30yr TSY ?

Fortunately, the math, surrounding correlations, suggests that there is no strong relationship that we should be concerned about.

Random Charts

For those who are Crypto believers, this will be a welcomed sight.

If/When we do get a rate cut from the Fed, the track record speaks for itself 1 year out.

Have a great weekend! Best

Meraki Trading team