Happy Sunday, friends! What a week we had. The two biggest events of our lifetimes: Nvidia earnings and Jackson Hole — and we managed to survive!
There's lots to discuss, so let's dive right in.
The Big Picture
Rising GDP estimates for Q3 have been the talk of the town, with the Atlanta Fed GDPNow model forecasting 5.9% expansion. While the data looks very encouraging, it is important to temper our expectations as most of the data for Q3 is still not yet available and these models can be quite volatile.
Nevertheless, upside economic surprises have been driving some of these expectations for growth, which have also been driving interest rates higher as some begin to take off the so-called recession trade of being irresponsibly long US sovereign duration.
Similarly, expectations about Fed policy have priced in one more interest rate hike to an upper bound terminal rate of 5.75%. The hike is expected to come in either the November or December meeting, however, with the Fed skipping September under the guise of being 'data dependent.'
The labor market is showing some signs of easing, with job openings falling modestly as we also get news of non-farm payrolls being revised downward by as much as 500K. Much of the job creation we have seen has been in services, and a fair amount of those jobs have been in travel and leisure, begging the question what happens when peak travel season ends.
We're seeing a pretty significant decrease in global composite PMIs for August as well, which could be an initial indicator that the global economy is cooling down again, with the UK, Eurozone, and Germany all showing month-over-month contraction and the US only marginally in expansion.
Within Asia import demand has been very weak, which is a driver of slowing ISM manufacturing PMI readings year-over-year. Another reason to be somewhat cautious on the back half of this year in terms of global economic outcomes, and how they may impact earnings.
Analysts expect that earnings will trough in Q2. With Q3 earnings season around the corner in mid-October, it will be interesting to monitor this situation and see if indeed the earnings recession ends or if we see more downside in Q3. Data is mixed such that it's not especially clear what to expect as Q3 seems to be a mix of acceleration and deceleration themes depending on where one looks.
