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Biggest theme this week: increasing tension between Trump and Powell (0:25). Interesting treasury markets (4:20). Airlines earnings, sector signs (5:10). Netflix reporting; valuation concerns (7:12). Stocks continuing overall melt up (8:00).
Transcript
Rena Sherbill: Brian Stewart, welcome to a special Thursday edition of Wall Street Lunch. Thanks for joining us in Kim Khan’s absence.
Brian Stewart: Always special to be here.
RS: Indeed. Talk to us about where we’re at Thursday afternoon, July 17th.
BS: I think the biggest theme so far this week has been the increasing tension between Trump and Powell. Trump’s gotten more belligerent about removing Powell lately. There were signs yesterday that his firing might be imminent.
However, Trump backed off from that. So we’re kind of still in the limbo that we’ve been in for a while with Trump sniping at Powell and Powell maintaining a stony silence about the pressure that he’s feeling.
It’s a complicated subject. In the macro view, the most important issue is the independence of the Fed. There’s a concern that if politicians start either directly fixing interest rates or have enough leverage over the Fed that they have a huge influence on the the current interest rate that will just end up with a zero interest rate in perpetuity.
It’s always gonna be in a politician’s best interest to have the lowest possible interest rates. That gets you low mortgage rates. It gets you low borrowing rates. So there’s always gonna be political pressure to have rates super low.
Trump in fact is pushing for an extremely low rate. He’s called on multiple occasions for rates to be cut by three percentage points, so down to the one percent area, which traditionally has been where things end up in dangerous emergency situations.
So it was in the 0% land for a long time after the financial crisis. It got down to 1% after the dot com bubble exploded. So you’re talking about a rate that’s usually only on the table for special circumstances, and that’s what Trump’s been pushing for lately.
RS: What else would you say about recent inflation data that we’ve seen? And anything to note about the bond markets, the dollar, or anything else to add to this part of the conversation?
BS: The most interesting thing about the pressure that’s coming lately is it it, in a way, economically, just looking at the data, it seems to be coming out of nowhere, the idea that we would cut rates to 1%.
Again, the political pressure for that makes a lot of sense. It’s the same political pressure that keeps the government cutting taxes and raising spending. So it’s not that surprising in that frame.
But if you look at the economic news, it’s pretty solid, 4.1% unemployment rate. That’s the low end of unemployment, that’s very healthy levels.
There was a contraction in terms of GDP in the first quarter, but signs so far this quarter show growth in the the mid 2% range, which is healthy where you would want it.
So there doesn’t seem to be a real economic crisis bubbling up unless Trump has information that we don’t have.
Meanwhile, inflation, which the core inflation rate was 2.9% in the most recent report. That’s traditionally at the high end. It’s disinflationary when compared to the spike that we saw in the post COVID era.
But if you look historically, 2.9% would be the high end of the range ex COVID for the twenty first century so far. So if we were sitting in 2015 with a 2.9% core CPI rate, that would be dangerously high.
And so you can understand Powell’s reluctance to cut rates, especially since I think Powell probably feels burned by the post COVID situation. He left rates low for a longer time than a lot of people wanted him to and inflation got a little bit out of control.
And so I think he’s very gun shy about making the same mistake again. I think looking at the the treasury markets is kind of interesting. The thirty year is currently around 5%. That’s just off its highs of the year. It was 4% last September. The thirty year rate is higher than it was. It started the year around 4.8%. So it’s actually gone up in 2025.
The movement in the lower duration treasuries is less substantial. The ten years around 4.4%, the five year around 4%. Both of those are down from their positions at the beginning of the year.
So you see most of the selling going on at the longer end of the yield curve. So as investors, I would keep an eye on that as this wrangling continues. I think that you’re gonna see the signs of displeasure more on the longer end.
RS: Recent earnings, anything to update us on? We saw some reports out of the airlines yesterday.
BS: Yeah. United (UAL) had its earnings last night. It was choppy immediately after the report. The company hit its bottom line, beat on the bottom line, but missed on the top line.
However, the stock at last check was up about 3%. Most of the problems that it faced during the quarter were from flight disruptions in Newark. So I think investors are taking that as a sign that this was a limited situation. It was outside the company’s control. And so the underlying operations remain strong.
And this follows up on a report from Delta (DAL) from last week. Delta jumps about 12% following its earnings report, and it beat expectations, set stronger than expected guidance, said that demand trends have stabilized at levels that are about flat to last year.
Meanwhile, corporate demand remains steady. So signs out of the airlines if we’re framing this also in terms of the overall economic picture and the debate between Trump and Powell, the signs from the airlines are that demand remains pretty strong for air travel, which is usually a pretty good sign both of the health of the consumer and health of corporate spending.
We’re gonna get more information next week. Southwest (LUV) is gonna report its earnings. The (JETS) ETF, which tracks the overall airline industry, it’s up 46% since its April low. So you’ve seen a lot of strength in airlines.
Things got pretty rocky for the airlines earlier this year with worries about the international situation, plus the escalating violence in the Israel Iran conflict, which spiked oil briefly.
So I think that what you’re seeing now is those geopolitical concerns are starting to back off a little bit, and you’re seeing a relatively healthy economic situation for the airlines.
RS: Netflix (NFLX) is also reporting today after the close.
I wanted to note that we’ve had two recent episodes on our Investing Experts podcast. Really, really bullish thoughts and analysis on Netflix, but, serious valuation concerns.
A lot of bullishness, but not necessarily long. So if you want a deeper dive into Netflix. Anything to say about Netflix or any other stocks reporting or having recently reported?
BS: I think you summarized it really well. The signs are that Netflix has been solidifying itself as the leader in the streaming space. It’s had a rebound lately, but the question becomes whether that rebound is a little overdone.
So yeah, exactly what you said. Valuation is the main concern going to the earnings now.
RS: So you wanna take us home with a brief minute or two on today’s markets? And listeners, please note that tomorrow, we will be back with our regularly scheduled Wall Street Roundup. Look for that on Friday afternoon. Take it away, Brian. Thanks for joining us again.
BS: Yeah. Sure. Stocks are up mildly today, kinda just continuing the overall melt up that we’ve seen generally.
Major news today is the retail sales report and jobless claims. Those came in relatively benign.
So again, you’re seeing a solid to strong economic situation, and I think that the debate over interest rates are going to be the the main headline getter for the rest of the month until the Fed announces its next move at the end of the month.
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