Launch Pad

Retail sales in the U.S. fell -0.6% in July, the largest monthly decline in more than a year and well below expectations for a 0.1% increase, as consumers reduced spending on autos and at online retailers (maybe due to the “Dopamine Sites” we wrote about earlier this week?). Excluding autos and gasoline, sales declined -0.2% versus expectations for a 0.3% gain, while the closely watched control group used in GDP calculations dropped -0.4%, also weaker than forecast. The report suggests consumer spending lost momentum after a stronger first half of the year, with tax refunds likely having provided a temporary boost. With the personal saving rate already falling to a four-year low in June, economists remain cautious about households’ ability to sustain spending. These weak numbers add to recent evidence of softer U.S. economic activity and raise concerns about the strength of the consumer heading into the second half of the year.

The yen’s brief rally last week following U.S.-Japan intervention is giving carry traders an opportunity to rebuild bearish positions, as Japan’s relatively low 1% policy rate makes the currency attractive for funding investments in higher-yielding assets. Despite hedge funds cutting yen shorts after the intervention, investors are again selling the currency, which has slipped back toward 160 per dollar and erased roughly half its intervention-driven gains. The strategy remains attractive because there continues to be wide interest-rate differentials, although renewed intervention or faster BOJ tightening could trigger a quick reversal and force traders to unwind positions. Japan’s government now appears supportive of another BOJ rate hike as soon as September or October, while markets currently price a 25 bp increase by October. For now, investors expect yen-funded carry trades to remain viable unless the BOJ becomes significantly more hawkish, U.S. yields decline significantly, or authorities manage to prevent further yen depreciation.

Tech stocks have become cheaper relative to the broader market even as earnings growth remains strong. A year ago, investors were paying roughly a 35% premium for expected tech earnings compared with the S&P 500, but that forward P/E premium has since narrowed to about 10%. The compression reflects a normalization from the elevated valuations which grew during the pandemic and afterwards by the AI investment boom. Strategists have been quick to note that the decline in relative valuations has not been accompanied by a deterioration in fundamentals, with sales growth, profit margins, and earnings estimates continuing to improve.

AI is creating risks for the heavily leveraged software companies that became a favourite target of private equity and private credit during the low-rate era. SaaS businesses were attractive because recurring subscription revenue, high margins, and low operating costs appeared capable of supporting substantial debt but improving AI tools are raising concerns that some existing software products could be displaced or see slower growth. The bigger vulnerability is financial leverage with higher interest rates, floating-rate debt, and expensive refinancing which means even the slightest revenue pressure could leave indebted companies struggling to meet their obligations. The key test will be through 2029 as more than $150 billion of software debt comes due.

Relentless. If you’ve taken, or are planning to take, a summer holiday in Europe this year, you’ve likely experienced one of the hottest summers on record. Europe’s fifth heat wave of the summer hit yesterday, straining health systems and energy networks. A series of high-pressure heat domes has put the UK on track for its hottest summer with temperatures in London reaching 35C. The extreme heat is stretching emergency services as London’s ambulance crews have been fielding more calls than at the height of the pandemic, while fire departments had its busiest ever July. Soaring temperatures are also again in the forecast for France, which has been at the centre of Europe’s summer heat waves and wildfires. Heat warnings have been issued across the country, with several regions set to reach 40C. The heat is also baking central and southern Europe, where governments have issued red heat warnings in Italy, Switzerland and Croatia.

Game on. The U.S. government says it brought more than 2,000 candidates into the air traffic controller hiring pipeline after launching a recruitment campaign aimed specifically at video gamers. The Department of Transportation and FAA believe that skills developed through gaming, including multitasking, problem-solving, and strategy can translate well to air traffic control, with the campaign using games such as Fortnite and flight simulators to attract younger applicants. Officials said the initiative has reached 94% of its hiring goal and helped candidates move through the recruitment process and into the FAA Academy faster than previous classes. And to the parents who thought all those hours of Fortnite were going nowhere… you may owe your kid an apology.

Copper prices are surging again as the main September-delivery contract jumped to a premium of more than $260 over October futures this morning, the widest one-month spread since a historic supply. This condition, known as backwardation, stems from a deepening squeeze on supply, and prompted the LME to introduce emergency measures designed to contain a runaway rally in spot prices. LME warehouses are a crucial last-resort source of supply to the physical copper industry, and metal in its depots can also be used to close out expiring futures contracts. As the volume of available inventories decline, holders of short futures positions can be forced into a bidding war to compel holders of inventories and expiring long positions to sell. These Copper inventories have dropped for 42 days, the longest run of declines since 2014, leaving volumes available to other buyers at critically low levels. The swift decline in LME inventories comes as traders and producers in the broader physical copper market have ramped up shipments to both the U.S. and China, where prices have been rising above those seen on the LME.