Inflation versus consumption

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FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.

Good day. Apple beat expectations, but its shares fell in after-hours trading. Amazon exceeded expectations and rose in recent operations. The Mag 7 doesn’t follow a single playbook. Send us an email: robert.armstrong@ft.com and Aiden.reiter@ft.com.

Weak inflation, strong consumption

Personal consumption spending inflation, the Federal Reserve’s preferred measure, rose 2.1 percent in September from a year earlier. That’s the best news yet on inflation and makes the Fed’s giant rate cut look smarter than its critics have recently suggested.

However, the news was not always good. The core PCE, which excludes volatile oil and food, fell only slightly, to 2.65 percent. Annualizing the monthly variation of the core, it rose for the second consecutive month. Inflation is mostly under control, but cheap energy is doing much of the work.

At the same time, surprisingly, American consumption shows no signs of slowing down. The PCE report showed that disposable personal income continued to grow above trend and that the average personal savings rate was still below the long-term average. Americans have more money in their pockets and they are spending it:

This fits perfectly with last week’s GDP numbers, where, again, the story was consumption. Final sales to domestic private buyers (which exclude trade, inventories and government spending) rose 3.2 percent, faster than last quarter.

Can slower inflation and very strong consumer demand coexist? They have done it so far, but it will be a delicate balance. Any exogenous shock could upset the balance.

(Reiter)

Imports

Imports rose unusually fast in the GDP report. There are several theories as to why.

“I suspect it was people who got things done before the dock workers went on strike. [in October]”said David Kelly, chief global strategist at JPMorgan Asset Management. In other words, importers drove demand. In fact, business inventories increased in July and August. If this is what is happening, imports should normalize next quarter.

But high demand could also play a role. “Consumer spending numbers are really strong, which makes sense as a flow toward imports,” said Claudia Sahm of New Century Advisors. “[Consumption indicators] are a better predictor [of the strength of the economy] than net exports or public spending, which tend to vary from month to month.” Again: normalization is coming.

Finally, the increase in imports may be a result of the rise of AI and diet drugs. Stephen Brown of Capital Economics told us that “most [the recent surge in imports] has been driven by computer equipment and pharmaceuticals,” rising to nearly 15 percent of total imports in July and August. Nvidia chips and Novo Nordisk injections may now be so large that they will significantly reshape the US GDP.

(Reiterate)

vistra

On the list of the top 20 S&P 500 stocks this year, as measured by total shareholder return, the Magnificent Seven have just one representative. It’s Nvidia, the company selling the silicon blades in the AI ​​gold rush.

But the Mag 7 has indirectly elevated three other companies to the top 10: the electric companies Vistra, Constellation and NRG. As Big Tech has lit up new data centers to run AI applications, utilities in the right places and with the right business models have fed the centers’ bottomless appetite for energy.

Vistra, the best performing company in the S&P, is the best positioned of all. It is a commercial energy supplier, meaning it sells most of its energy on the open market, so its profits respond quickly to changes in electricity prices. And Vistra is connected to the PJM regional transmission system, a power grid that covers the area stretching from the mid-Atlantic coast inland to Ohio and western Kentucky. Crucially, PJM covers Virginia, which for a variety of reasons is home to the densest data center population in the country (yes, more than California). What this means for Vistra is best expressed in the PJM chart below, which shows the results of the system’s last 11 annual energy analyses. auctions. This year, the price per megawatt hour increased up to ten times compared to the previous year (LDA means local delivery area):

The tough question is whether Vistra, after its epic year, has moved ahead as a stock. Wall Street expects the company’s free cash flow to increase steadily from 2024 through 2027. If that’s true, then the stock is still very reasonably priced. But that will require energy prices to remain high. It seems like a solid bet, given the current pace of data center construction. But it is not a certainty for two reasons. One: the AI ​​revolution could fail, to a greater or lesser degree. Second: Even in the hyper-regulated, capital-intensive world of utilities, supply is elastic. The new offer will find a way.

Utility stocks with rising tech stocks also have risks in tech stocks.

a good read

Chinese cars.