Weekly Research Briefing: And The Door Opens

• “Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers.”
• “This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
• “Tighter immigration policy has led to an abrupt slowdown in labor force growth.“
• “Higher tariffs have begun to push up prices in some categories of goods.”
• “The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts."
• “Putting the pieces together, what are the implications for monetary policy? In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside — a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance."

The dovish speech seemed to be a little bit out of step with some other recent Fed speak. The Chicago Fed’s Austan Goolsbee has talked about his concern about building services inflation. Cleveland Fed President Beth Hammack said she doesn’t see the need for a September cut at all. And in Thursday’s Odd Lots episode, Kansas City Fed President Jeffrey Schmid talked about how maybe we should be discussing the possibility of a rate hike. It’s doubtful that Powell would open the door to a September rate cut without being certain he has enough committee votes to approve it, however.

Federal Reserve Chair Jerome Powell said on Friday that the central bank would revert to its policy approach used prior to 2020. But the Fed might be better served by reaching back to its tack of more than a generation ago.

William McChesney Martin, who chaired the Fed from 1951 to 1970, famously said the role of the monetary authorities was to take away the punch bowl just as the party was really warming up.

By any measure, the markets are partying hearty, with stocks hitting records, corporate credit spreads at quarter-century lows, plus myriad signs of speculative fervor. Those include margin debt topping $1 trillion for the first time, the revival of initial public offerings (most of which have experienced big opening-day price pops), record options activity, and even the revival of special purpose acquisition companies (SPACs), or blank-check companies for the next big thing.

Those are hardly the circumstances suggesting the need for easier money.

US junk bond yields plunged to a new 40-month low on Friday, spurring the best one-day gains in nearly three months after Chair Jerome Powell signaled that the Fed is open to a rate cut in the next meeting, shifting focus to downside risks to the labor market rather than upside risk to inflation…

BB yields tumbled to a new 11-month low of 5.80% pushing returns of 0.36% on Friday, also the best since May. CCC yields, the riskiest part of the junk bond market, dropped 20 basis points on Friday to 10.58%, the biggest one-day decline since mid-June on renewed hopes of a rate cut in September. CCCs notched up the best performance in the high yield universe, with returns of 0.53% on Friday, the biggest one-day surge in more than two months.

The supply boom in the primary market is expected to persist after a surge in June, July and August amid still attractive yields, tight spreads and robust total returns against the backdrop of an accommodative monetary policy in the coming months. JPMorgan strategists boosted their supply forecast for 2025 on strong demand and willingness to take risk. The bank estimates junk bond supply for the year to be $300b, up from the earlier forecast of $225b. It also boosts leverage loan supply to $985b, from $600b.

@Bruce_Markets: Tight as a Drum (+76 bps)

Investment Grade Corporate Credit Spreads trade at the 0 percentile, a spread of +76 bps vs. UST, the tightest spread since 1997 (see table below). A-rated bonds trade at +62 bps, while BBBs are +96bps.

Reasons why spreads are so tight:

• Credit risk and balance sheets has improved for IG issuers
• Credit conditions in the financial markets are at its easiest level since pre-COVID
• The Fed will soon embark upon an easing cycle
• Corporate earnings are strengthening
• The risk of recession is low
• Investor Demand is robust (higher UST yields allows the absolute yield level to remain ~50%, despite tight spreads)

These strong fundamentals paint a supportive picture for IG credit; however, historically tight spreads suggest that much of the positive outlook is already reflected in current pricing. Investors should remain disciplined and selective, with no reason to sell IG at the current juncture as our favorable credit conditions should remain intact. Since diversification and intelligent asset allocation decisions remains paramount to long-term wealth creation, capital allocators can identify compelling non-IG and Private Credit that will continue to offer higher IRR/MOIC profiles as yield premiums for higher yielding assets should continue to meaningfully enhance portfolio income, just as it has over the years.

@JC_ParetsX: those are now new 5-month highs today for small-caps vs large-caps

A glance at $8T worth of portfolios at the start of Q3 2025 showed portfolio managers of both hedge funds and mutual funds VERY underweight Info Tech stocks. Part of the mutual fund difference could be attributed to concentration limits. But for hedge fund managers, that would be a bold bet against technology stocks.

Nvidia’s size, it’s the biggest weight in the S&P 500 at almost 8%, and its position at the center of AI development have made it a bellwether of the broader market. The tech giant’s chips are everywhere, 40% of its revenue comes from Meta Platforms Inc., Microsoft Corp., Alphabet Inc. and Amazon.com Inc. — all are among the Top 10 weightings in the S&P 500.

Despite elevated economic uncertainty in markets during the first half of 2025, private equities have seen a sharp increase in exit activity compared to the first half of 2024. Deal volumes are up 104% y/y to over $330B and deal count is up 18% y/y to over 730 deals. Private equity firms commonly exit their investments by selling them to corporations or other private equity firms (M&A), or through public listings (IPOs). They then use these proceeds to return capital to their investors.

Not long ago it would have been hard to imagine a Republican President demanding government ownership in a private company, but here we are. And now the Trump Administration is toying with a tax on patents too—meaning, a tax on innovation.

President Trump on Friday trumpeted that the U.S. government will take a 10% equity stake (worth about $8.9 billion) in Intel, the struggling maker of computer chips. The President made CEO Lip-Bu Tan an offer he couldn’t refuse. “He walked in wanting to keep his job, and he ended up giving us $10 billion for the United States,” Mr. Trump said of their meeting this month.

A few weeks ago Mr. Trump demanded Mr. Tan’s resignation after Arkansas Sen. Tom Cotton alleged he had business entanglements with China that posed a national-security threat. The Administration was holding up $9 billion in Chips Act and defense funds that the Biden team had promised Intel, giving the President leverage over Mr. Tan.

@TheTranscript_: $WMT CFO: "...as we replenish inventory at post tariff price levels, we've continued to see our costs increase each week, which we expect will continue into the third and fourth quarters."

PepsiCo is raising the price of its carbonated soft drink concentrates by 10% starting September 7, 2025, in the United States. This increase comes as the company responds to mounting cost pressures, especially from new tariffs on imported soda concentrates and aluminum, as well as ongoing changes in consumer spending habits.

@KevRGordon: Prices paid component in Philly Fed Manufacturing is still on a tear

Silicon Valley, powerful as it is, should be wary of ticking off 67 million Americans. PJM Interconnection is a regional transmission organization that manages the biggest electricity grid in the US, covering all or part of 13 Midwestern and mid-Atlantic states plus the District of Columbia. In all but four of those states, plus DC, average annual power bills in the year through May increased faster than the national average, which was eyewatering in itself at over 6%.1

Plug prices, rather than pump prices, are igniting a political firestorm. In New Jersey, the latest flashpoint, utility bills figure prominently in a gubernatorial race that has gained national attention and is less than three months from election day. And at the heart of all this is the race for artificial intelligence…

After many years of flat electricity demand, PJM now forecasts an imminent jump, and it takes time — as well as spiking price signals — for energy supply to react. The culprit is the AI boom, with PJM serving Virginia’s burgeoning data center alley. Some 64% of those ballooning capacity payments that began hitting bills in June relate to actual and projected datacenter demand, according to Monitoring Analytics’ calculations.

@nickgerli1: For the first time ever, it is considerably cheaper to buy a new house than to buy an existing house. Likely signals an inflection point in the housing market.

American Airlines Group Inc., JetBlue Airways Corp. and Allegiant Airlines said in recent earnings conference calls that they have only booked 20% or less of revenue from seats that they expect to sell for the final three months of the year, which the carriers indicated was less than they would normally expect. Airlines don’t typically provide advanced bookings numbers unless asked specifically by analysts.

During an earnings call in July, JetBlue cited lower-than-normal advanced bookings as part of the reason it declined to provide a financial forecast for the period. Allegiant said it still had “a lot to go” on ticket sales for the fourth quarter, adding that passengers generally book about six weeks before travel, with holidays normally purchased further out.

“Listen to any travel company, they will tell you the booking window is shorter than it’s been in a long time,” said Conor Cunningham, a Melius Research analyst. “They don’t have any visibility.”

For hotels, the real squeeze is being felt in the lower and middle end of the market. Higher-for-longer interest rates, persistent inflation and uncertainty around immigration and trade have created an environment of continuing economic volatility for economy and midscale guests, who remain especially sensitive to these dynamics, according to Geoffrey Ballotti, chief executive of Wyndham Hotels & Resorts, which owns more than 9,000 hotels worldwide, most of them in the mid-market…

At the beginning of August, analytics companies CoStar and Tourism Economics downgraded their US hotel performance forecasts for both 2025 and 2026 due to “unrelenting uncertainty and inflation”. Demand, which had been forecast in January to grow 1.1 per cent year on year, is now expected to be close to flat for 2025.

The decline in international tourism, too, may soon have a more pronounced effect. Baird analyst Bellisario warns that the impact of the Canadian boycott of goods and services in the first months of 2025 may have been blunted by the fact that people did not want to cancel pre-booked flights and accommodation. But that could set the stage for even steeper declines this winter as “snowbirds” trade trips to Florida and Arizona for Mexico and the Caribbean.