Today
The prospect of higher U.S. rates has pushed the dollar to its highest level in almost two months, with the Canadian dollar, euro, yen and pound all weaker against the greenback this morning. Fed officials continue to signal that last week’s rate hike, the first in three years, may not be enough to bring inflation under control. Richmond Fed President Thomas Barkin said yesterday that temporary price shocks could prove more persistent than expected and that one hike may not be enough, although Barkin is not currently a voting member of the FOMC. The ECB is facing similar inflation pressures from higher energy prices but has less room to tighten given weaker economic growth and expectations. That divergence in the expected path for rates is providing additional support for the U.S. dollar. Meanwhile, Brent crude remains below $100 a barrel, easing some of the inflation pressure behind the recent repricing of rates. Equity futures are slightly lower this morning after the S&P 500 struggled yesterday as weakness in financials offset strength in AI-related stocks. Financials fell about -2% as Meta’s Muse AI agent prompted investors to reassess the potential impact of AI across financial services.
Not a-MUSED. Meta’s Muse AI agent triggered a selloff yesterday, but not where you’d necessarily expect. While software companies have been the main target of AI disruption this year, it was banks, insurers, and financial-services companies among the biggest decliners, while travel platforms, telecom providers, and subscription businesses also came under pressure. Analysts have pointed out that the more sophisticated AI agent could automatically compare prices, book travel, negotiate services, and handle customer-service interactions (at least no more time on hold), potentially threatening industries that benefit from recurring bills. The larger concern is that personal AI agents could weaken customer loyalty. Yesterday’s reaction also points to a new era of AI disruption beyond software companies, with businesses whose margins and customer retention depends on not shopping for better alternatives.
With the Fed back in tightening mode for the first time in three years, Chair Kevin Warsh used last week’s post-meeting press conference to explain why policymakers were willing to raise rates despite the uncertainty surrounding the inflation outlook. The Fed raised the federal funds rate by 25 bps to 3.75%–4%, with Warsh focusing on the longer-term inflation trend rather than individual data points. He said that inflation has remained too high for too long, while a strong economy and full employment gave the Fed room to prioritize price stability. The bigger question now is how much additional tightening is needed. The Fed’s projections point to at least one more increase this year, although Warsh has pushed back against the dot plot and conventional forward guidance. His refusal to discuss the neutral interest rate also leaves investors with fewer guideposts about how incoming economic data will translate into future policy decisions.
Had to slow eventually. The outlook for U.S. corporate earnings has started to weaken, with analysts cutting profit estimates more often than raising them for the first time in 23 weeks. This ends the longest streak of net upgrades since 2021, with downgrades concentrated in consumer staples, consumer discretionary, materials, and financials, reflecting pressure from higher living costs, rising energy prices, and higher interest rates. Despite the reversal, analysts still expect a strong year for U.S. corporate earnings, with the revisions seen as more of a warning about near-term momentum. The combination of weaker earnings expectations and declining valuation multiples could, however, create additional pressure on equities, especially if energy prices rise further and force the Fed to tighten policy even more.
Canada’s six banks are teaming up to explore a new way of moving money digitally as payments become faster and operate around the clock. Royal Bank, TD, BMO, Scotiabank, CIBC and National Bank are starting with tokenized deposits, which would essentially create a digital version of money already held in a bank account that could be transferred and settled almost instantly, including outside normal banking hours. The money would remain a conventional Canadian-dollar bank deposit rather than becoming a cryptocurrency. Ottawa has been looking to strengthen Canada’s domestic financial infrastructure and reduce economic reliance on the U.S., while banks are also responding to the growth of stablecoins and other digital payment alternatives. Canada’s banking regulator recently confirmed that tokenized deposits are permitted under existing legislation and are legally no different from traditional deposits. As they say, money never sleeps.
U.S. office demand is recovering, but considerable distress remains among older buildings and the loans that finance them. Office CMBS delinquencies reached 12% in July, near a record and above post-2008 financial-crisis levels. With close to $64 billion of office CMBS debt maturing within the next two years, and almost $40 bln already delinquent, in default, or on watchlists, refinancing could be a significant pressure point. Chicago’s Aon Center is one example after being purchased for $712 million in 2015 and recently appraised at $195 million, leaving its securitized mortgage now distressed. Higher interest rates aren’t helping, with borrowers now unable to rely on cheap refinancing, forcing owners either to inject additional capital into impaired properties or hand them back to lenders. The market, however, is divided, with newer premium buildings and markets in New York and San Francisco, recovering faster, while older buildings in cities such as Chicago, Denver and Los Angeles continue to contend with higher vacancies and impaired values.
Some people collect stamps…A man has spent nearly three decades attempting to visit every Starbucks in the world, reaching 20,563 locations across 74 countries since beginning the project in 1997. Much like the Greek story of Sisyphus, his goal may appear unending, with Starbucks expanding from under 1,500 stores when he started to more than 29,000 today, with locations opening and closing faster than he can visit them. Reaching over 20,000 stores has provided him with a unique perspective on the company, believing that the recent turnaround is showing positive signs, including more comfortable seating and an emphasis on making stores places where customers want to linger. The project has come at both a financial and personal cost, however, costing at least $180,000 and interfering with his personal relationships and career.
Diversion: Wanna play?
