Powell pivots?

Jay Powell used his Jackson Hole remarks to unveil the Fed’s five-year “framework review,” releasing a revised Statement on Longer-Run Goals that rolls back key parts of the 2020 regime.  He said the Fed is returning to flexible inflation targeting, dropping the prior “makeup” strategy that tolerated inflation overshoots, removing language that treated the effective lower bound as a defining feature of the landscape, and deleting the “shortfalls” phrasing on employment to clarify the Fed’s balanced approach when the two mandates are in tension.  On the outlook, Powell noted tariffs are lifting prices but framed that as a likely one-time level shift, while stressing the Fed won’t let it morph into a persistent inflation problem and that longer-term expectations remain anchored.  He also said policy is “restrictive” and about 100bp closer to neutral than a year ago, adding that the shifting balance of risks could warrant an adjustment in stance—but emphasized decisions are data-dependent. Finally, he reaffirmed the 2% inflation goal and the commitment to act forcefully to keep expectations anchored.

• Fed Chairman Powell seems to have shifted his tone in the much-anticipated speech, signaling a greater focus on a potentially weakening labor market
• This signals the market that cuts are likely coming, as early as next month
• This is in stark contrast to the Chairman’s prior “wait-and-see” approach
• Markets reacted very positively to the Fed Chairman’s speech, with the S&P trading within its all-time-highs
• Bonds rallied also, with the 10-year yield dropping ~70bps
• The US Dollar dropped almost 1%
• A more dovish (likely to cut rates) Fed should be positive to commodities and cyclical sectors of the market in the near term
• However, it also runs the risk that inflation will remain elevated, putting further pressure on the consumer
• All in all, it feels like we are in the midst of a stagflationary environment, something not seen since the 1970s

Housing market shows signs of bifurcation

The housing market showed more signs of strain this week. National data indicated that home prices are now falling in roughly half the country, with sharper declines out West. Builder sentiment slipped to its lowest level since 2022, reflecting affordability challenges even as mortgage rates ease from recent highs. Toll Brothers, a major luxury homebuilder, reported strong quarterly earnings but lowered its delivery outlook for the year, a signal that demand is weakening at the higher end of the market. At the same time, new construction is increasingly tilted toward rentals, where demand remains robust. The picture is one of a cooling ownership market paired with steady strength in multifamily housing.

• The real estate market has always been very much focused on location
• It seems that in parts of the country, housing prices have begun to come down
• Given that this housing market is the most unaffordable in history, this is a welcome sign for potential buyers in those markets
• However, certain markets, particularly in the Northeast of the country, remain very tight and unaffordable for first-time home buyers
• This is where we are also seeing strength in the rental markets

Retail earnings

This week’s retail updates underscore a resilient but increasingly discretionary-conscious consumer. Walmart reported Q2 revenue of $177.4 billion, a solid 4.8% year-over-year increase, with global e-commerce up 25% and same-store comps rising around 4.6%, helping it raise full-year guidance despite an earnings miss of $0.68 per share versus the $0.73 expected. Target beat expectations too, with Q2 sales of $25.21 billion and EPS of $2.05, though comparable-store sales dipped 1.9%, offset by a 4.3% gain from digital channels and double-digit growth in its ad and marketplace businesses. Meanwhile, Ross Stores, known for its value positioning, reported a 5% rise in Q2 sales (to about $5.5 billion), and forecast same-store sales gains of 2–3% in Q3–Q4; signaling that budget-focused shopping remains in demand. Taken together, these results show that while consumers are still buying, they’re favoring value, essentials, and digital convenience.

• Earnings from retailers like Walmart and Target always give us insight into the consumer
• Based on the recent results, it seems like the consumer continues to focus on value on essentials over discretionary spending
• The digital channel also continues to grow, continuing the long-held trend away from brick-and-mortar
• Overall, the consumer continues to spend but shows signs of stress and a preference for value

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