FOMC Road Map, TikTok Gets More Time, August Consumer ... Chill?

Happy Fed Day!

The Federal Reserve Bank's Federal Open Market Committee went into session on Tuesday morning. This afternoon, the policy setting committee will produce an official statement and the group's quarterly economic projections. Roughly 30 minutes later, Fed Chair Jerome Powell will step to the podium and take questions from the financial media for 45 minutes or so, give or take about ten minutes. Though markets have not been active week to date, I do not feel that volume has been as light as I feel it usually is for the days ahead of a decision that will impact the monetary policy of the nation and everyone in it.

Perhaps that's because the outcome of this meeting is not really in much doubt. Or... at least we think we know what is about to happen in our nation's capital. Currently, Fed Funds futures trading in Chicago are showing a 100% probability for at least a quarter-percentage point rate cut this afternoon with just a 4% likelihood for anything more than that. The only surprise might be that Fed Governors Stephen Miran and Lisa Cook are both participants in this meeting.

Traders, investors, economists and citizens will be looking for the central bank to publicly pivot from a focus on one side of its dual mandate (price stability / fighting inflation) to the other (full employment / labor markets). It is likely that this pivot will be visible in both the statement and the economic projections. It is also likely that Chair Jerome Powell will reinforce this pivot at his press conference. Yes, there is a possibility that there could be a "sell the news" event, especially if any one of these three prongs of policy evolution come off as less dovish or more hawkish than either traders or the keyword reading algorithms that have largely replaced them are comfortable with.

What comes next? Currently those same futures markets are pricing in 78% probability for a second quarter-percentage point rate cut on Oct. 29 and a 73% chance for a third quarter-point rate cut on Dec. 10. This market is also pricing (61% probability) in an additional three-quarter-points worth of rate cuts for calendar year 2026.

Red Hot Consumer?

Not really. On Tuesday, the Census Bureau posted extremely optimistic looking numbers for August retail sales. At the headline, retail sales were up 0.6% from July, well above the consensus view which was for growth of 0.3%. In addition, July was revised to +0.6% from the initial report for +0.5%. Ex-autos, August retail sales were up 0.7% from July, beating expectations for growth of 0.4%.

Where was the strength? Apparel was up 1%. OK, that's back-to-school shopping. Non-store or internet retail sales were up 2%. That's especially strong but could also be part of "back to school." Most importantly, at least on the surface, was the 0.8% growth in the component I refer to as the "fun index."

The "fun index" is the component labeled "Sporting Goods, Hobbies, Music and Books." This is the one category that is purely discretionary in nature. People do not buy these things when they are having trouble making ends meet and feeding their families. Yet here was August growth of 0.8% that came after July growth of 1.6%.

I don't mean to be a party pooper, but the consumers I know are hardly giddy about their current situations. There are a couple of facts to contend with here. One, the Census Bureau does not adjust for inflation. These are nominal numbers that are then seasonally adjusted. Yes, that means that inflation is in these numbers and inflation has been heating up a bit this summer. 

It also means that any tariffs collected by the federal government that were ultimately paid by the importer and then passed on to consumers are included here and appear as organic growth. One possibly extremely important item that the mainstream financial media completely whiffed on was the fact that for August retail sales without the seasonal adjustment, were down 0.4%.

That's right, -0.4% month-over-month. Readers should be fully cognizant of the fact that this is unusual for August. So, is the consumer really as strong as the official data suggests? My short answer is "not likely." I would also like to know why a larger than normal seasonal adjustment was applied? if it was to correct a past error, then say so. Don't leave kids like myself to figure it out for ourselves.

Interestingly...

You're going to love this. On Tuesday, the Atlanta Fed GDP Now model for the third quarter was revised upward to growth of 3.4% from 3.1% (SAAR). This was at least partially due to an increase made to the model's contribution from Q3 real personal consumption expenditures from 2.3% to 2.7% and that change was based on the August retail sales print that we now know was in nominal, non-seasonally adjusted (raw) form, unusually negative. Things that make you go hmmm.

Tuesday

Treasury yields fell slightly ahead of the Wednesday FOMC policy statement. By day's end, the U.S. Ten-Year Note paid just 4.03%. I saw that instrument yielding just 4.02% this morning. In addition, the Two-Year Note paid just 3.51% by day's end, down 2 basis points for the session. This all came on top of an absolutely stellar auction of $13 billion in new Twenty-Year Bonds. Direct Bidders (domestic accounts) took down 27.9% of the issuance which is a new record high for that series. Dealers, incredibly, were left with just 7.5% of the auction, which may not be enough to meet their needs.

Equities did not stray very far on Tuesday. That said, there was some light profit taking. The S&P 500 gave up 0.13% while the Nasdaq Composite came close to closing flat at -0.07%. That was enough though to bring an end to the Nasdaq Composite's winning streak and six-day string of record closing highs. Most of the mid-majors were either up small or down small on Tuesday.

Only three of the S&P sector SPDR ETFs closed in the green with Energy XLE way out in front aided by the weaker U.S. dollar. Health Care (XLV) closed unchanged, while seven of these funds closed out the day in the red. Once again, defensives led the losers with the Utilities (XLU) bringing up the rear.

Losers beat winners by less than a 5-to-4 margin at the NYSE, while winners beat losers by just a tad at the Nasdaq. Advancing volume took just a 47.5% share of composite NYSE-listed trade, but a much healthier 59.2% share of composite Nasdaq-listed activity. Aggregate trade was up day over day across NYSE-listings, but lower day over day across Nasdaq-listings.

Yes, your wins and losses from Tuesday still count, but to put it bluntly, Tuesday did not count for much from a technical perspective. The game begins again in earnest this afternoon.

News

- As expected, Pres. Donald Trump signed an executive order on Tuesday that extended the deadline to enforce a ban on social media platform TikTok out to Dec. 16. On Monday, Treasury Sec. Scott Bessent said on Monday that the U.S. and China had all but reached a commercial agreement that would put TikTok in domestic hands, on national security concerns. The agreement needs the approval of both heads of state. Presidents Trump and Xi are expected to talk this Friday. Oracle ORCL is said to be part of a group of U.S. investors that will be involved in the transfer of ownership in the US.

- Overnight, according to the Financial Times, the Cyberspace Administration of China outright banned Chinese technology companies from purchasing AI-capable chips from U.S. designer Nvidia NVDA. Beijing has been pressuring local tech companies to boost semiconductor production in an effort to break the nation's dependence upon U.S. designers to stay competitive in the global AI race. Interestingly, I have not been able to find out if this ban includes chips designed by Nvidia competitor Advanced Micro Devices AMD.

- On Tuesday, Salesforce CRM announced the launch of its new business unit, Missionforce, which will focus on integrating artificial intelligence into national security workflows. In July, the U.S. Army awarded Salesforce a $100 million Enterprise License Agreement. Am I surprised that after all this time, someone has stepped up to compete with Palantir PLTR in this space? No. I am surprised that it took so long for the rest of the big data/generative AI cloud software industry to even try to compete with Palantir. I had long expected Snowflake SNOW to try to make that move, but alas, the first challenge will come from Marc Benioff's operation where sales growth has slowed dramatically over the past two years.

Economics 

(All Times Eastern)

07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.49%.

07:00 - MBA Mortgage Applications (Weekly): Last 9.2% w/w.

08:30 - Housing Starts (Aug): Expecting 1.37M, Last 1.428M SAAR.

08:30 - Building Permits (Aug): Expecting 1.37M, Last 1.362M SAAR.

10:30 - Oil Inventories (Weekly): Last +3.939M.

10:30 - Gasoline Stocks (Weekly): Last +1.458M.

The Fed 

(All Times Eastern)

2:00 p.m. - FOMC Policy Decision.

2:00 - FOMC Economic Projections.

2:30 - FOMC Press Conference.

Today's Earnings Highlights 

(Consensus EPS Expectations)

Before the Open: CBRL (.77), GIS (.82)

At the time of publication, Guilfoyle was long NVDA, AMD, PLTR equity.