What we learned last week:
Del: “You know, Stubville is a little further than Wichita.” Neil: “How much further?”
Del: “30 miles. Maybe 40. No more than 45 though. Depending on which way he goes. If he goes on the back roads, it could be anywhere up to 70 miles.”
– Planes, Trains & Automobiles (1987)
Markets reacted to a Fed rate hike and finished another week waiting for direction. The Dow Jones Industrial Average and S&P 500 closed the week lower while the tech-heavy Nasdaq gained. Stocks were batted around by rising interest rates and oil prices, and the potential for a slowdown in advanced AI model development.
As the market waited for the Fed rate decision Wednesday afternoon, tech stocks began the week losing ground after further calls to address the risks to humanity from advanced AI models.
Anthropic CEO Dario Amodei and OpenAI CEO Sam Altam started the week calling for a slowdown of the advanced AI models. Their call for a slowdown comes after former Anthropic researcher Jacob Coxon warned the two AI companies are “gambling with our lives”.
While tech stocks finished on an encouraging note, the week’s main event was Wednesday afternoon.
The Federal Reserve policymakers voted unanimously to increase the central bank’s policy rate 0.25% to between 3.75% and 4.00%. At a news conference after the announcement Fed Chair Kevin Warsh said, “the plain fact is that inflation is too high and has been for too long.” Alongside the announcement were economic projections, all but two members of the Federal Open Market Committee forecast another rate increase this year.
Warsh attributed the recent increase to three factors, “first is economic strength”, the second is “the situation in hot spots around the world” (referring to the Iran and Ukraine wars impact on energy prices) and the third factor, he said, is competition for capital from artificial intelligence companies.
Bond yields began their surge higher in July. Leading up to last week’s announcement all three major U.S. stock indexes closed lower six times in seven sessions.
The Fed wasn’t the only central bank to raise rates. On Wednesday Japan’s central bank raised its main interest to a new three-decade high. In an effort to control rising prices and the fall in the value of their currency, The Bank of Japan increased the rate from 1% to 1.2% – a level not seen since 1995.
Why are Japan’s interest rates and currency, the Yen, being watched by U.S. investors?
Japan is the largest foreign holder of U.S. debt. A collapsing Yen makes importing goods more expensive and destabilizes the economy there. A destabilized Japan economy forces them to sell U.S. treasuries to finance domestic stabilization efforts – which in turn raises borrowing cost for the U.S.
Higher interest rates aren’t the only theme pushing stocks around. Rising oil prices are contributing to the waiting game.
Oil prices continued their march higher after reports Yemen-based militant Houthis struck Saudi Arabia’s infrastructure and ships, putting a crucial pipeline out of service for weeks. Tankers have been able to export oil of the Red Sea thanks to Saudi Arabia’s 745-mile-long-East-West Pipeline, rerouting oil away from the Persian Gulf.
One major cost input is the price of diesel fuel, which hit an all-time high of $6.31 per gallon on Wednesday. Diesel fuel is considered the U.S. economy’s “single most universal tangible input” as it starts with truckers, railroads, all commercial and industrial transportation, ultimately hitting the consumer’s wallet.
Rates and oil prices will continue to be an important factor for markets this week. Of course, AI news could drive stocks in either direction. Investors have checked the Fed rate decision off their list, but the waiting game continues as yields and oil prices remain elevated.
What’s ahead this week:
Economic Reports
- The U.S. flash Manufacturing and Services Purchasing Managers’ Index survey is an early glimpse at the month-over-month change in business activity in the two sectors.
- Friday’s durable goods orders measure new orders placed with U.S. manufacturers for machinery, computers, airplanes, automobiles, and defense equipment
Earnings
- Consumer companies are under the microscope this week with quarterly earnings reports from;
- Autozone
- General Mills
- Costco
- Darden Restaurants (owner of Olive Garden, Longhorn Steakhouse, etc.)
My goal is for you to feel educated and informed about variables we do and don’t have control over and find ourselves working within. I hope to do it in an informative and relatable way. As always, I value your relationship and planning objectives – my door is always open for conversation.
