Blue Trust

Real retail sales growth in Q3 suddenly looks weak.

Core retail sales fell in Sep, after strong growth in the 3 months prior. Better to evaluate it on a 3-month basis (orange), which would look decent except goods inflation is high (gray).

The 5 largest U.S. stocks have had divergent buyback policies. $AMZN: steady diluter $NVDA: depends on the year $GOOGL: diluter turned share cannibal $MSFT: slowing buybacks $AAPL: share cannibal (37% reduction over 10y!)

Saw an alarming Bloomberg headline today: "Notices of Impending Layoffs by US Companies Surged in October" So I pulled the data, and it's a lot less alarming. The data that BBG reported (in blue) is only from a set of 21 states and is not seasonally adjusted. BBG left off the Cleveland Fed's layoff estimate (in orange) that's designed to provide a more complete national-level indicator of job losses.

In Q3, hyperscalers reported impressive revenue & staggering capex growth. $META had the highest revenue growth (26%), capex growth (128%) & capex intensity (37%). Combined, $META, $GOOG, $AMZN & $MSFT spent $97b on capex in Q3--24% of their revenue.

Powell started with "the outlook hasn't changed," but then quickly turned hawkish, saying that a rate cut in Dec was "far from a foregone conclusion" amid "strongly differing views in the FOMC." He also suggested that if the data vacuum persists (due to the gov't shutdown), it could make sense to pause rate cuts until the fog clears. On the dovish side, he did say that non-market services & tariffs are to blame for much of inflation's overshoot, and that the Fed doesn't take much signal from those when assessing the tightness of the economy. He also said that job creation is likely close to zero; albeit, labor supply (the immigration crackdown) is mostly to blame, and state-level initial claims & Indeed job openings don't show further deterioration.

Gold's been on a tear--almost doubling--since Feb 2024. We believe its breakout is due to the US's increased unilateral policies (sanctions, tariffs...) & budget deficits. Gold's performance is attracting trend-following strategies. So far though, positioning isn't extreme.

You can easily make the case that the top 5 stocks in emerging markets (TSMC, Tencent, Alibaba, Samsung & Hynix)--which make up 22% of EM index funds--are all tech stocks, even AI stocks. Yet, only 25% of all EM is officially classified as tech.

Ugly employment data from ADP this morning. Sep job growth was -32k & Aug was revised down to -3k (first consecutive negative months since 2020) Recently, ADP's closely tracked BLS payroll data (scheduled for Friday), which will likely be delayed due to the gov't shutdown.

Home prices fell again in July, for the fifth consecutive month, but only by -0.1%. It appears prices may be stabilizing after the cumulative 1.1% decline since Feb.

Friday brought more good news on the consumer, as real spending growth in July was revised up and Aug came in high & above expectations. The Fed's nowcast for Q3 GDP growth is now 3.9%.

On Thursday, Q2 GDP growth was revised up from 3.3% to 3.8%, due to a big boost in consumer spending. The 1H economic slowdown now seems much more mild.

The Fed lowered rates 0.25% today. Powell's key (paraphrased) remarks are below: "We expect tariff-driven goods inflation to build the rest of this year & into next year." "The tariff passthrough to consumer prices has so far been slower and smaller than expected." "This rate cut is a 'risk management cut.' Job growth has slowed markedly, hence the need for insurance against labor market weakness." "The breakeven rate of payroll growth might be somewhere between 0-50k jobs/month." "Growth & the labor market have cooled which lowers the risk of prolonged higher inflation after this wave of price hikes from tariffs."

Aug retail sales growth came in strong (even after accounting for higher inflation) & better than expected. Consumer spending in Q3 appears to be resilient in the face of tariff-based price hikes & a softening labor market.

Today's headlines: "In August, employment increased by only 22k." Except we're very uncertain about that number. It's better to think about job creation in terms of a range... "August's change in nonfarm payrolls was likely between -114k and +158k."

Employment may have declined over the last 3 months (first box below). Regardless, the lack of breadth in job creation is concerning. For 5 consecutive months, <50% of industries have created jobs. The only major industry that we can be confident added jobs over the last 3 months is health services (second box below).

Stocks, bonds, gold, and bitcoin are surging--and the dollar is falling--in reaction to Powell's speech this morning. He suggested that the risk to employment has grown, so modestly restrictive monetary policy is likely less appropriate now. The probability of a rate cut in Sep rose from 75% to 89%.

It's early, but a good start for Q3 consumer spending. We'll be watching to see if tariff-based price hikes & a softening labor market weigh on spending in the months ahead.

Friday's retail sales report revealed a surprisingly resilient consumer. 3-month sales growth (orange line) is the highest it's been in a year. However, with goods inflation accelerating, growth is likely less impressive on a real basis.