Note: I am travelling for 2 more days. Postings may be fewer and shorter.

US CPI:

• The July CPI continued to build the case for disinflation. Core CPI rose 0.2% in July (or annualized 2.6%), firmer than flat prices in June, but still helping to move the trend down. Even so, two months is not enough, and the PPI will also shape whether it’s a good PCE print. (Claudia Sahm)

• July’s inflation report was close enough to expectations to ease pressure on the Federal Reserve to raise interest rates next month without resolving much about the outlook beyond that. Monthly inflation readings have taken on greater importance this summer because officials are deciding whether they can still defend a forecast that has inflation coming down without higher rates, or whether they need to raise rates to get there. Data for June and July haven’t suggested the type of broadening in price pressures that would force officials to abandon the forecast. Neither do they resolve worries that inflation is settling in above the Fed’s target. (Nick Timiraos)

AI side benefits:

But behind those incredible numbers is a deliberate strategy: [GE Vernova CEO] Strazik has successfully pivoted to new growth areas, in part by turning new customers such as NVIDIA and nuclear-energy startup Blue Energy into R&D partners. In an era of accelerating speed and complexity of transformation, that’s a playbook worth studying.

“The technical hurdle with how they want to run AI factories is much more complex than our standard‑fare offering, and that’s great,” said Strazik. “What I see happening is a lot of the technology we’re developing to help them … will ultimately apply to the broader grid over time. But they will have funded a lot of the learning curve.”

EARNINGS WATCH

Tariff Refunds Are Here—and Turbocharging Earnings Apple, Nike and FedEx are just a few companies recovering big sums relatively quickly, and some are passing at least a share on to customers

So far, over 40 S&P 500 companies have reported some $9.6 billion in refunds in the past quarter or so, including at least $2.1 billion in cash already received.

Among the biggest refunds reported so far: Apple, at nearly $2.2 billion; Nike, at $986 million; FedEx, at about $800 million; Amazon.com, at $640 million; and General Motors, at $500 million.

U.S. Customs and Border Protection had received just over 252,000 refund applications as of July 31 for tariffs declared unlawful by the Supreme Court. The customs agency accepted $128.7 billion in refunds for processing, an agency official told a federal court last week.

Nike said it had received $302 million in refunds in the last quarter of its fiscal year ended May 31—and received almost all of the remaining $684 million by July 15, when it issued its annual report to shareholders.

Other companies have made clear they are still awaiting the outcome of some refund claims. Fortive, which makes industrial-measurement equipment and automation technology, recognized a $4.5 million benefit for tariff refunds received but said it expected as much as $25 million more in coming periods.

Reported refunds don’t always reflect money in the bank, and companies are handling the sums in different ways on their financial statements. Some record them only as cash arrives, while others are also reflecting likely payments in their financials. (…)

In some cases, refunds have contributed handily to quarterly results. Apple said its tariff refunds contributed 11 cents to per-share earnings in the most recent quarter—about 5% of the quarter’s total. (…)

Yet for many companies, even sizable benefits from tariff refunds are offset or overshadowed by the tariffs they continue to pay. Caterpillar recorded $392 million in expected tariff recoveries in the most recent quarter and said its outlook for the remainder of the year doesn’t include further recoveries. It does expect to incur a total of $2.2 billion in tariff payments for the year, not considering the recoveries.

So far, technology hardware companies have reported the highest refunds, at $2.5 billion across half a dozen companies. Nearly 90% of that reflects Apple alone.

More than a dozen capital-goods companies reported about $1.3 billion in refunds, including heavy equipment makers Caterpillar and Deere ($272 million), defense contractor Lockheed Martin ($140 million over six months) and toolmaker Stanley Black & Decker ($118 million).

Several companies have said they’ll share refunds with customers. FedEx said it would start disbursing its $800 million in refunds to shippers and consumers in August.

FedEx said it functions as a pass-through for customers and is required to collect duties and taxes. The company said customers can track the status of their tariff refunds on FedEx’s website.

Costco—one of many companies hit by class-action lawsuits from refund-seeking consumers—has said it plans to pass tariff refunds to customers “in some form” and at levels similar to the tariff costs it had passed on to them. The company said the federal refund process on its own could take months.

IDEX, which sells pumps and valves to a range of industries, said it expected to rebate $14.7 million to customers. That is about two-thirds of the more than $20 million it received.

Some companies were less clear about the source of their expected recoveries. Ford Motor said it expected around $3 billion in tariff reimbursement from the federal government and suppliers combined, of which about $1.3 billion stemmed from the Supreme Court’s decision invalidating President Trump’s emergency tariffs.

Amazon said it had identified a “limited set of circumstances” in which it could trace the cost of tariffs passed on to customers and would contact those customers to issue refunds once they receive the cash.

“Otherwise,” CFO Brian T. Olsavsky said in a July earnings call, “we’ll utilize refunds to continue to invest in low prices for customers.”

Whatever it takes self defense:

White House Asks Justice Department to Consider New Reflecting-Pool Prosecution Officials asked the department whether it is possible to bring new charge against Olympic canoeist after U.S. attorney dropped case

Note: I am travelling for another week. Postings may be fewer and shorter.

EARNINGS WATCH

Despite optimism about consumer prices, there are signs of pressure in the pipeline. Raw materials prices are increasing, and not just oil. The Commodity Research Board’s RIND (Raw Industrials) index, which covers industrial products that aren’t quoted on futures markets, is rising sharply, as is Bloomberg’s index of the major industrial metals:

The CRB’s RIND Index is up 9.3% YoY while major industrial metals prices are up 31.4%. These higher prices quickly boost producers profits, but they are also costs, many Hormuz-related, that eventually transit into users’ input costs. They then migrate into higher consumer prices and/or lower profit margins.

If earnings growth has been a party dominated exclusively by Big Tech, the guest list expanded in the second quarter. Nearly everyone else is joining in as tech giants relinquish their advantage. With all S&P 500 companies now having reported their earnings, non-technology groups are on course for their second-best quarter since the debut of ChatGPT in late 2022 — though they’re still far behind the remarkable overall earnings growth recorded by the Magnificent Seven leading the artificial intelligence buildout:

This is quite unmistakably a huge cyclical boom. Deutsche Bank’s Binky Chadha notes that overall S&P 500 profits growth accelerated to 34%, from 25% in the first quarter, one of the highest figures ever outside of recoveries from recessions. All sectors are on track to deliver growth, with seven of the 11 in double digits. While tech is still the lead driver, its contribution to aggregate growth is “only” 55% from about 90% a year ago.

Note that the 7/11 in double digits include tech industries (including Consumer Discretionary with AMZN’s AWS) and Energy and Materials strongly benefitting from the above.

Looking ahead, analysts estimate that ex-Tech, Energy and Materials, profits will rise 6.7%, 10.7%, 8.5% and 5.7%, on average, in each of the next 4 quarters respectively. This is 7.9% growth on average over the next 12 months. Not quite the “unmistakable huge cyclical boom”.

John then adds these important factoids:

• Societe Generale’s Andrew Lapthorne offers another illustration of this. Nearly 90% of S&P 500 companies reported increased sales. The number improving their margins, however, was barely half that:

Time will tell how the cyclical inflation will migrate into consumer prices and/or profit margins.

John concludes:

Still, the way the market has handled these earnings is in one way exceptionally encouraging. Earnings multiples are falling. Over history, a rerating like this is almost always achieved by prices falling. This time around, earnings have grown to justify the previous generous multiples:

Investors generally pay less for cyclical profits, anticipating they can’t last very long.

The yield on 10Y Ts closed at 4.72% yesterday, up from 3.9% when the war on Iran started. Not only telling something about inflation, but also impacting P/E multiples.

China’s Teapots May Boost Iran Oil Buying as Stockpiles Dwindle

Shrinking regional oil stockpiles held by China’s independent refiners in Shandong province may spur increased buying of Iranian crude, offering Tehran a needed boost after a period of slow sales.

Inventories in Shandong — home to most of China’s so-called teapot refiners — dropped to 360 million barrels in July, the lowest level in eight months, according to data compiled by Energy Aspects. Stockpiles in the region are held by both private as well as state-run processors.

China’s teapots dialed back purchases and relied heavily on stockpiles after Beijing instructed them to maximize fuel production to help cushion the impact of the Iran war. The refiners are by far the biggest buyers of Iranian crude, typically accounting for about 90% of sales, and softening demand led to a swelling hoard of the country’s oil on tankers at sea.

Energy Aspects estimates stockpiles in Shandong declined by 35 million barrels last month, the biggest monthly draw since the consultant started compiling the figures in 2016. Across China, meanwhile, the nation’s inventories still stands at a robust level of 1.208 billion barrels as of August 6, according to Kpler estimates which includes underground strategic reserves sites. (…)

China aggressively built up its crude stockpiles last year, providing a buffer for refiners after the Iran war disrupted supplies from the Middle East. Tapping that inventory also took some demand pressure off the global market, and is one of the reasons why oil prices haven’t surged much higher. (…)

In the USA: