Good Morning!

Fitch just gave the U.S. a credit rating haircut - from AAA to AA+! They point to “expected fiscal deterioration over the next three years”. They also highlight the rising government deficit, which it anticipates “will rise to 6.3% of GDP in 2023, from 3.7% in 2022”. With interest expense on U.S. debt expected to hit $1 trillion this year – Houston, we DEFINITELY have a problem!

👷‍♀️ The resilient US labor market showed some signs of easing in June. The number of job openings fell to its lowest level (9.6 million) since April 2021. Hiring slipped to the lowest since February 2021, as did the quits rate at 2.4%, and layoffs dropped to the lowest since 2022. Meanwhile, at 1.6, the ratio of job openings to unemployed workers remains well above the pre-pandemic average of 1.2.

👎 America’s creditworthiness has seen better days. Fitch Ratings downgraded its credit rating for the US to AA+ from AAA yesterday. It was the US’ first cut by a major rating firm in over 10 years. The move comes after Fitch placed the US on its downgrade watchlist in May amid the debt limit ceiling debate. There were several key drivers behind Fitch’s decision, including a lack of erosion of governance, rising government deficits, and a projected Q4 recession. Treasury Secretary Janet Yellen was quick to criticize the “arbitrary” decision, citing the firm’s use of “outdated data”.

🏭 Surveys from S&P Global and ISM confirm US manufacturing remains in contraction. While the former was unchanged from June, the latter increased by less than expected and has remained below 50 (the threshold for expansion) since August 2022. Looking under the hood, new orders, employment, and prices all remain in contraction. Separately, four out of five regional manufacturing surveys reported declining activity and new orders in July.

🤖 Threads is reportedly struggling to keep users engaged. That could be changing soon. Meta is making moves aimed at retaining users across all platforms. The company will soon launch a wave of AI chatbots dubbed “personas”. These “personas” will feature different personalities—like Abraham Lincoln, for example, or guy-that-can-help-with-travel-booking—that users can ask questions to, seek advice from, or just shoot the breeze with. Another trick these AI chatbots will be able to perform: harvest more user data.

🔮 With the first half behind us, what does H2 have in store for stocks? According to Goldman Sachs, August is the worst month of the year for flows. In terms of returns, it also tends to be a weak month in the third year of US presidential cycles (which we are in), but September is even worse. Going back to previous such years, nearly all have seen pullbacks of varying degrees beginning in August. However, history suggests the headwinds could be minimal given the S&P’s strength YTD.

🛢️ Stocks of crude oil in the US experienced their biggest weekly draw since 1982. Crude stocks dropped by 15.4 million barrels last week against expectations of a modest 0.9 million decline. Separately, OPEC output saw its sharpest drop since 2020 in July, falling by 900k barrels per day. Aggressive short covering by money managers and hedge funds, meanwhile, has helped lift prices to the highest in 3 months.

📊 Yesterday’s highlights:

$CAT Caterpillar: $5.67 EPS (vs. $4.50 expected) ✅, $17.32 billion in sales (vs. $16.46B expected) ✅.

• Higher costs of materials (and thus prices) were not enough to deter demand for construction products.

• All three major business segments saw higher sales.

• A booming construction sector is expected to keep demand robust.

$UBER Uber: $0.18 EPS (vs. -$0.01 expected) ✅, $9.23 billion in sales (vs. $9.33B expected) ❌.

• The company notched its first operating profit as well as its first +$1 billion FCF quarter.

• Monthly active platform users also increased by 12% YoY.

• It issued current quarter guidance for bookings and adjusted EBITDA above analysts’ estimates.

👀 What we’re watching today:

• $QCOM Qualcomm

• $CVS CVS Health

• $SHOP Shopify

• $PYPL PayPal

• $EQIX Equinix

• $MCK McKesson

• $TRI Thomson Reuters

• $MELI Mercadolibre

• $RACE Ferrari

• $HUM Humana

• $OXY Occidental Petroluem

• $EMR Emerson Electric

• $PSX Phillips 66

• $PSA Public Storage

• $MET MetLife

• $JCI Johnson Controls

• $TT Trane Technologies

• $KHC Kraft Heinz

• $WMB Williams Companies

• $EXC Exelon

• $SPG Simon Property Group

• $O Realty Income

• $ABC Americourcebergen

• $YUM Yum Brands

• SPX ATH: JPMorgan’s trading desk says a new all-time high in the S&P 500 “feels inevitable”.

• Custom chips: AMD is considering developing an AI chip specifically for China to comply with export controls.

• Tesla probe: US regulators have opened a probe into 280k new Tesla vehicles regarding steering issues.

• News block: Meta is blocking news availability in Canada in response to the Online News Act.

• Bait-and-switch: Initially stating it would provide the tech for free, Meta plans to charge cloud-computing companies for reselling its Llama 2 LLM.

• Flagged: The US House committee has flagged BlackRock over investments around 50 blacklisted Chinese companies.

• What ban: Despite China’s ban on crypto, Binance facilitates ~$90 billion of crypto trading a month in the country.

• Trump indicted: Donald Trump has been charged in connection with his attempts to overturn the results of the 2020 election.

• Arm IPO: SoftBank’s Arm is aiming for a $60 to $70 billion IPO in September.

• Yellow bankruptcy: Apollo is leading a deal to provide cash to Yellow Corp during its upcoming bankruptcy.

• CRE push: KKR is opening an LA office to explore commercial real estate opportunities in the region.

• Coke M&A: By way of acquisition, Coca-Cola Europacific Partners aims to become the world’s largest Coca-Cola bottler by revenue and volume.

• Debt package: Blue Owl and Sixth Street will provide one of the year’s largest private credit loans to Francisco Partners and TPC for their New Relic acquisition.

Sources:

• https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023

• https://twitter.com/ISABELNET_SA/status/1686319466534043648

• https://thrasheranalytics.substack.com/p/pre-election-seasonality-suggests

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