Jonathan Kitchen
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Core retail inflation a tad hot, boosting odds of quarter-point Fed cut. (0:16) GameStop tumbles after sales fall. (2:25) Arm Holdings named a top pick. (3:39)
This is an abridged transcript of the podcast.
Our top story so far. Retail inflation hit its lowest level in 3-1/2 years, but a slightly higher measure of prices for food and energy further entrenched the market’s belief that the Fed will be cautious when it cuts rates next week.
The Consumer Price Index rose 0.2% in August, matching estimates and bringing the annual rate down to 2.5%, a level not seen since February 2021. The year-on-year rise matched expectations and came down from 2.9% in July.
But the core CPI rose 0.3%, a little hotter than the 0.2% rise forecast. The annual core rate stayed steady at 3.2%.
Shelter was, once again, a main factor in the increase, rising 0.5% in August. Airline fares bucked the recent trend and jumped 3.9%.
Pantheon Macro says: “The August pick up in the core index was driven by components that have a much smaller weight in the core PCE deflator—the Fed’s preferred inflation gauge—or which are sourced from the PPI.”
Treasury yields erased losses after the report, with the 2s10s curve (US2Y) (US10Y) nearly flat. Odds of the FOMC cutting by 25 basis points in the September meeting (vs. 50 bps) jumped to 85% from 70% ahead of the print. Fed funds futures are now pricing in three rate cuts by the end of the year, down from four.
Economist Joseph Brusuelas says: “The sticky service sector inflation and persistent housing inflation in my estimation are consistent with a 25-basis-point cut by the Fed.”
“One would imagine that Powell would face a challenge getting a majority of a data dependent committee to go along with a 50-bps cut. Moreover, I think it’s not the size of the initial cut that is important but rather the destination of the journey that is important to firms and investors.”
Stocks have been struggling since the opening bell, with the Nasdaq (COMP.IN) down -1% and the S&P 500 (SP500) off -0.75%.
Michael Brown, strategist at Pepperstone, says: “For equities, focus remains not on what the Fed will do, but what the Fed can do.”
“With 500bp of room to reduce rates, as well as the potential to bring quantitative tightening to an end were conditions to require it, the ‘Fed put’ remains as strong and as forceful as ever. In turn, this should see equity dips remain relatively shallow in nature, and give investors confidence to continue positioning themselves further out on the risk curve,” he said.
Among active stocks, GameStop Corp. (GME) fell sharply after it reported quarterly revenue that fell 31.2% year-over-year. EPS was $0.01 for the quarter, vs. -$0.09 consensus.
In an SEC filing, GameStop said it has initiated a comprehensive store portfolio optimization review, which involves identifying stores for closure based on many factors, including an evaluation of current market conditions and individual store performance.
Baird analyst Colin Sebastian said the GameStop results underscore the ongoing challenges to the company’s retail business model, but added that while “retail shareholder dynamics are seemingly the only support to valuation and liquidity, bulls could also point to hardware and the expected release of GTA VI next year as catalysts,” wrote Sebastian.
Novo Nordisk (NVO) (OTCPK:NONOF) released full results from an early-stage trial for its experimental weight-loss pill amycretin. The results, presented at a European medical event on diabetes in Madrid, indicated that the drug’s potential is comparable to that of the company’s existing obesity products.
Early data from the study sent Novo shares sharply higher in March. In addition to GLP-1, which is the sole target of the company’s incretin-based obesity therapy Wegovy, amycretin targets a pancreatic hormone called amylin that affects hunger.
And Morgan Stanley made chip company Arm Holdings (ARM) its new large-cap Top Pick, citing mobile recovery, new edge AI opportunities, and resulting royalties’ expansion.
Analyst Lee Simpson, who has an Overweight on the stock with a $175 price target, said that after the launch of Apple’s (AAPL) iPhone 16 and the indicated use of Arm v9 architecture in the A18 processor, the British company remains their favored play on the emerging Edge AI opportunity. He expects mobile to drive initial upside, followed by infrastructure and autos.
In other news of note, DirecTV rejected an offer from Disney (DIS) that would have restored the ABC network to subscribers for the duration of the first presidential debate Tuesday night.
DirecTV subscribers lost access to Disney’s networks on Sept. 1 after the two sides failed to reach a new distribution deal.
A DirecTV spokesman told Reuters that restoring the ABC network for three hours would be confusing to subscribers, who were able to watch the debate via other networks.
J.P. Morgan noted that blacked-out sports could add urgency for both sides to make a deal.
Analysts said “ESPN will have an exclusive MNF match-up for each of the next six weeks, which is in addition to significant college football inventory across its sports networks; beyond this, ESPN has exclusive rights to MLB Wild Card series in early October. Our base case remains a resolution over the coming weeks.”
And in the Wall Street Research Corner, UBS has updated its presidential election outcome stock picks to reflect a closer race.
Analysts picked names that would benefit from what UBS sees as the two most likely scenarios: a Harris win with a GOP Senate and Democratic House (40%) and a Trump win and Republican Congress (35%).
For the more risk-averse, David Lefkowitz, head of U.S. Equities, says: “Investors looking for ways to insulate portfolios from election-related volatility can consider adding exposure to gold (GLD) and the Swiss franc (FXF) — both seen as hedging assets by the market.”
Among stocks benefiting from a Harris win are Tesla (TSLA), Eaton (ETN), Waste Management (WM), First Solar (FSLR) and Johnson Controls (JCI).
Red sweep picks include Ford (F), ConocoPhillips (COP), Bank of America (BAC), Merck (MRK), and Texas Instruments (TXN).
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
