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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/span><\/p>\n This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newsletters<\/p>\n Good morning. Treasury yields at both the short and long end of the curve have been creeping up the past few days. Is the September rate cut, which seemed like a lock after the July jobs report, coming into doubt? Federal Reserve chair Jay Powell speaks in Wyoming on Friday. Email us: unhedged@ft.com.<\/p>\n Everyone knows that economic forecasting is hard. Less appreciated is how difficult it is to know what the economy is doing now<\/em>, or even was doing a few months ago. The signals are often equivocal and they generally disagree. Today we have a good example of this from two of the most important US indicators: retail sales and job growth.<\/p>\n After the June retail sales report, Unhedged noted that while retail sales were holding up overall, there were signs of tariff pressures, for example in weak sales in import-dependent categories where prices are rising, such as furniture and electronics. The July report showed some of these unpleasant trends (electronics, negative again) but not others (a bounce in furniture). And the June report was also revised up a bit. It comes as a slight a surprise to us, but retail sales have kept on rolling:<\/p>\n Those are nominal numbers, but even adjusting for inflation, retail sales are growing at perhaps 2 per cent a year. The solid news is echoed in private data. Bank of America reports that spending on its debit and credit cards rose almost 2 per cent in July, the fastest rate since January.<\/p>\n On the other hand, as we have written, job creation has been declining:\u00a0<\/p>\n How to close the apparent gap between steady consumption and weakening job creation? We see four possibilities:<\/p>\n The decline in jobs reflects a falling supply of workers, not weakening underlying demand that would also show up in consumer spending. We wrote about this possibility here.\u00a0<\/p>\n<\/li>\n Because consumer spending is increasingly driven by the richest cohorts of consumers, the sales data underplays weakness in the economy that shows up in the employment report. Here, for example, is Bank of America\u2019s breakdown of credit and debit card spending by income level:<\/p>\n<\/li>\n<\/ul>\n Household balance sheets remain quite strong, so households can continue to spend normally even as the economy and job growth cools. Evidence of balance sheet resilience is contained in the New York Fed\u2019s household debt and credit report for the second quarter, which showed declining rates of transition to delinquency across loan types and age cohorts (with student loans as a significant exception). Here, for example, are credit cards:<\/p>\n<\/li>\n<\/ul>\n Consumption will eventually slow to match the jobs trend. Oliver Allen of Pantheon Macroeconomics, for example, writes that\u00a0\u201cfurther weakness lies ahead, as the weak labour market and further tariff-related increases in goods prices mean that real incomes essentially flatline. Moreover, the 0.4 per cent drop in food service sales in July highlights that the consumer downturn since the start of this year is weighing on demand for discretionary services too, not just goods.\u201d\u00a0<\/p>\n<\/li>\n<\/ul>\n We\u2019re open to other thoughts from readers.<\/p>\n Last week we noted that the Treasury market has been remarkably stable in recent months: yields have stayed in tight trading ranges across the curve, and implied volatility has been declining steadily. We ascribed this to an underlying tension between the growth and inflation outlooks, which counterbalance one another. But there is another interpretation: that volatility is being deliberately suppressed.<\/p>\n Michael Howell of CrossBorder Capital writes that the suppression of Treasury bond volatility \u201cappears to be a deliberate policy\u201d of the Federal Reserve and the Treasury.<\/p>\n His argument runs as follows. The key marginal buyer of long-term Treasuries is basis traders: funds holding highly leveraged Treasury bond positions against short positions in Treasury futures, betting that the small difference in prices between the bonds and the futures will close. With a flattish yield curve and declining interest in Treasuries from foreigners, basis traders are the only buyers for whom long Treasuries are particularly attractive. But as with any highly leveraged trade, low volatility is a must. A rise in Treasury volatility would send the basis traders running for cover.<\/p>\n So the monetary and fiscal authorities want to keep the basis traders in the game by keeping money markets flush with cash, which in turn keeps the Treasury market calm. Volatility suppression might be behind a number of policy choices, according to Howell. The decline of the Fed\u2019s reverse repo facility; the pick-up in active Treasury \u201cbuybacks\u201d (replacing off-the-run Treasuries with more liquid on-the-run Treasuries); the mooted revocation of banks\u2019 supplementary liquidity ratio (which would allow banks to own more Treasuries)\u2019; and the shift towards shorter duration US debt issuance are all examples.<\/p>\n Some readers may find Howell\u2019s view a bit conspiratorial. But Unhedged agrees with it this far: low Treasury volatility is a major support for all corners of financial markets, because Treasuries are the most important form of trading collateral, and the value of this collateral falls as its volatility rises. Almost everyone in markets therefore has an interest in low Treasury volatility, and might engage in implicit co-ordination to protect it. <\/p>\n Suppressing volatility \u2014 in markets or nature \u2014 is hard to do forever. Keep a close eye on the Treasury market.<\/p>\n Many readers responded to yesterday\u2019s piece about tech\u2019s dominance of markets. Several disagreed with my claim that even if artificial intelligence turns out to be a profits bust, data centre investments will not be a deadweight loss because \u201call that computer power will be useful for something\u201d. One reader, Nick Banner, correctly surmised that I was thinking back to the fibre-optic overcapacity built curing the telecom\/dotcom bubble, which came in very handy after the bust. This will not be the case with the AI data centres, Banner wrote:\u00a0<\/p>\n A strand of glass is a strand of glass, and you achieve ever-higher data rates [over fibre] by upgrading the terminal equipment (lasers, multiplexers, amplifiers, etc).<\/p>\n Data centres, on the other hand, are at heart racks of high-end Nvidia chips. But those chips are in effect consumables \u2014 they\u2019re (rightly) depreciated over 2-4 years, because they\u2019re superseded in that timeframe. Demand for four-year-old GPUs is pretty low. And the reason why they are in demand now is almost entirely because of [AI]\u2009.\u2009.\u2009.\u2009<\/p>\n If this is right, a lot is riding on the success of AI as a business (rather than a technology). If the prospects for AI profits dim, Nvidia\u2019s $4.4tn market cap will take a major haircut, and the valuations of Microsoft, Alphabet and Meta will take a knock as well, as multibillion-dollar writedowns will be in the offing and growth expectations will have to be cut, too. Again, the problem looks less like high market concentration and more like high market expectations.<\/p>\n No.<\/p>\n Can\u2019t get enough of Unhedged? Listen to our new podcast, for a\u00a015-minute dive into the latest markets\u00a0news and financial\u00a0headlines, twice a week.\u00a0Catch up on past editions of the newsletter\u00a0here.<\/p>\n Due Diligence<\/strong> \u2014 Top stories from the world of corporate finance. Sign up here<\/p>\n The Lex Newsletter<\/strong> \u2014 Lex, our investment column, breaks down the week\u2019s key themes, with analysis by award-winning writers. Sign up here<\/p>\n","protected":false},"excerpt":{"rendered":" Unlock the Editor\u2019s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newsletters<\/p>\n","protected":false},"author":1,"featured_media":16607,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49],"tags":[1404],"class_list":{"0":"post-16606","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-economy"},"_links":{"self":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/16606","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=16606"}],"version-history":[{"count":0,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/16606\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/media\/16607"}],"wp:attachment":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=16606"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=16606"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=16606"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Retail sales vs jobs<\/h2>\n
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Volatility suppression<\/h2>\n
Are data centres wasting assets?<\/h2>\n
One good read\u00a0<\/h2>\n
FT Unhedged podcast<\/h3>\n
Recommended newsletters for you<\/h3>\n