We have an eventful week ahead, but today’s topic revolves around events and how seemingly unrelated events can impact each other. Two completely different events or data points when put together can begin to draw the real picture that a singular number could never do. Understanding how these global events connect is often more useful than understanding any single number in isolation.
Weekly Recap
This past week, we had a lot of interesting news. To begin, housing data on Tuesday sent mixed signals. Housing starts fell 12.4% to a seasonally adjusted annual rate of 1.239 million, well below the 1.35 million expected, while building permits rose 5.0% to 1.443 million, pointing to a steadier pipeline even as actual construction activity slows under mortgage rates near 6.7%. As we mentioned last week, it is important to look at the whole picture rather than just cherry-picking data points.
Retail earnings carried the rest of the week. Home Depot (NYSE: HD) beat Tuesday with adjusted EPS of $4.92 against $4.73 expected but reaffirmed rather than raised guidance, citing a frozen housing market. Target (NYSE: TGT) beat Wednesday with EPS of $4.11 against $2.33 expected, though nearly $1 billion of that came from tariff refunds, with shares slipping on the context. Walmart (NYSE: WMT) closed the week Thursday beating on revenue but guiding Q3 below estimates, sending the stock lower despite raised guidance. Wednesday also brought the July FOMC minutes, showing the 9-3 hold masked a wider hawkish camp than just the three dissents.
Moreover, an interesting event this week with Treasury secretary Scott Bessent announcing that the Treasury Department would at least double its buyback purchases of 10-to-30-year debt. It was an aggressive attempt to talk down long-term borrowing costs from new highs and initially, 10y and 30y yields fell. This was quickly followed by levels returning more or less to where they were. To the broader market and me, it felt like putting a band aid over the symptom rather than solving the problem of compounding US Debt.
What I'm Watching Next Week
Turning to the week ahead, the main highlight is Kevin Warsh's first keynote event as the new Fed chair. The Jackson hole symposium runs from Thursday August 27 through Saturday August 29 in Wyoming with financial innovation and payments being the theme. As Warsh has pulled back on forward guidance compared to Jerome Powell, this speech is close to the last real chance for a signal before the September 16 FOMC decision which is currently priced with almost a 40% chance of a rate hike.
We also have Core PCE, durable goods orders, and the GDP second estimate for Q2, all before the bell on Wednesday. This puts the Fed's preferred inflation gauge (PCE) on the same morning that Nvidia (NASDAQ: NVDA) earnings report post market. Moreover, Salesforce (NYSE: CRM) and CrowdStrike (NASDAQ: CRWD) also report Wednesday and will be worth watching given the increased volatility in the technology sector over the past few weeks. Finally, Dollar General (NYSE: DG) reports Thursday morning which will give traders an idea of where low-income spending is headed having seen pressure from tariff driven inflation.
Research
With that in mind, let us begin to dive into a common problem. Let’s say that shark attacks and ice cream sales are up in July but as we think about this, these events are completely different. You think that this must just be a coincidence. After all, does eating ice cream increase shark bites? No, and shark bites do not increase ice cream sales either. So, we chalk it up to randomness and move on, except that is not quite right either. Both numbers are being pulled up by the same underlying force, warmer weather sending more people to the beach, more people into the water, and more people reaching for ice cream, all at once. Neither one causes the other, but they are not unrelated either, they share a hidden variable that explains both. This is the difference between correlation, causation, and true irrelevance, and it is worth having that distinction in mind, because markets hand us this same puzzle far more often than most traders stop to notice.
One of the hottest topics over the last few months has been the Strait of Hormuz and the oil supply. This disruption reads as a story about energy prices, but the effects run much further than that. Roughly a fifth of the world's oil and a meaningful share of its liquefied natural gas pass through that strait, and natural gas happens to be the key input for producing ammonia, the building block for nitrogen fertilizer. A shipping disruption that spikes natural gas prices raises the cost of fertilizer production, and higher fertilizer costs eventually show up in the cost of growing crops thousands of miles away, in fields that have nothing to do with the Middle East and farmers who may never think about a shipping lane. The chain gets stranger the further you trace it. Naphtha, another oil derivative that ships through the same strait, is a core ingredient in colored printing ink. When the war in Iran squeezed naphtha supply this year, Japanese snack maker Calbee (TYO: 2229) had to switch several of its potato chip bags to black and white packaging simply to keep production running. Unlike ice cream and shark attacks, this is not a coincidence sitting on top of a shared but unrelated cause. It is a chain of effects. It shows why a single geopolitical chokepoint can end up mattering to a grocery bill or a convenience store shelf on the other side of the world.
Another version of this effect was seen this week. Volatility sat relatively calm on Monday, then a global bond selloff took hold by Tuesday and Wednesday. 30Y Treasury yields hit levels not seen since 2007 sending the Philadelphia Semiconductor Index sliding 5%, and Asian equities opening sharply lower. SK Hynix (KRX: 000660) sat at the center of it, still working through the leverage and positioning fallout from the circuit breakers triggered back in late July, even as a buyback announcement mid-week pulled the stock in the other direction. None of these moves happened in isolation, a bond market repricing in the US showed up in Asian chip stocks within a trading day.
Looking at the currently grim looking future, the US national debt sits as the clearest example of a genuinely difficult, causally connected problem. US debt has crossed $40T, with servicing costs now running over $1T a year. This is a bill that grows regardless of what else happens in the economy. From here, every lever pulls in a different direction and carries its own cost. Higher growth would help outrun it but cannot simply be willed into existence. Inflation would erode at the direct expense of the households which are already squeezed by tariffs. Spending cuts would help directly but have stalled politically for years. None of these paths are neutral, and none exist in isolation from the others.
Leaning on inflation to erode the debt only works by letting price growth run further above target, and headline CPI already sat 1.4 percentage points above the Fed's 2% goal as of data from August 12th. Pushing that further to chip away at the debt keeps real yields elevated for longer. This raises the cost of financing the next round of issuance and offsets a good part of the relief inflation was supposed to provide. Delaying spending cuts to avoid the political cost only pushes more of the total burden onto growth and inflation to do the work alone. Whichever lever is avoided today adds pressure to whichever lever is used tomorrow. This debt, unlike a gray chip bag, carries a price. A dollar that buys less, a mortgage that costs more, and a federal budget squeezed by its own interest payments affect real working people. Debt levels are upstream of housing, Fed policy, and everything that relies on the dollar. It is a global chain rather than an irrelevant correlation and understanding that chain matters more than predicting exactly if or how it resolves.
Personal
As for my trading, the increased volatility with yields last week brought options prices back up given Bessent's Treasury buyback announcement, followed by the data through the rest of the week. I am constantly reminded that what works today has no bearing on what works tomorrow let alone for the next few decades where I will hopefully still be trading. The idea of impermanence forces all traders to adapt to the changing markets with the same events happening in different circumstances yielding completely different results. There is a reason that all investments carry the same warning: past performance is not indicative of future results.
With the Jackson hole symposium, big earnings releases, and data, it is important to be aware of fat tails. This is the idea that so called ‘black swan’ events happen more than a normal distribution or the Black-Scholes model would assume. Options to some extent price this in with implied volatility being higher the further out of the money you go. The Heston model is too deep of a topic to begin exploring today but taking this concept into account is important to remember when we go into large financial events.
Looking back at the week, none of this was shark attacks and ice cream. The Hormuz to naphtha to Calbee chain and the bond selloff reaching SK Hynix were both true causation, one event pulling the next one forward. The debt is the same, a chain rather than a coincidence, just slower moving and without a clean endpoint yet. The distinction matters because a trader who mistakes causation for coincidence closes a position too early, and a trader who mistakes coincidence for causation holds one for the wrong reason.
Disclaimer: Everything here reflects my own opinions and is shared for informational purposes only. It is not financial advice, and nothing in this report is a recommendation to buy or sell any security.