Daily Rundown - August 31

CHRIS VERSACE : Good morning, Action Alerts Plus members. As we noted in Alerts all week, it's a slower news week with thinner trading volume, which makes, as you know, every piece of economic data all that much more important to watch. So let's go through our top priorities for the week, starting with this morning's PCE index.

As expected, the July figure ticked higher to 4.2% from 4.1% for the core PCE figure. Again, a key data point that the Fed watches and therefore one that we watch as well. But let's remember the context here for this data set.

Even though it was up sequentially, it was still below levels seen earlier this year, matching expectations, not surprising to the upside. That has the market more or less taking the data point in stride, once again focusing on what's ahead. And that means tomorrow's August employment report.

Before we get to that all-important commentary on wage pressure and job creation in the month of August, let's talk about 2 things. First, the Fed's target for core PCE is 3.9% for the full year of 2023. Now, we've got 7 months in hand with this morning's data.

And it means that we're going to need to see much more pronounced improvement to hit that target level. Again, the July figure was 4.14-- excuse me, 4.2% up from 4.1%. And it was higher earlier this year. So the simple math tells us that we need to see much greater declines in the coming months to hit that target.

Second, disposable income fell again in July even as consumption rose. This tells us that consumers are either digging further into their savings or they're taking out even more debt in the form most likely of credit card debt. Now, next week brings the July consumer credit report. And that will show us where consumers are making ends meet.

Now, our concern is this. Declines in disposable income mean consumers are likely to become even more selective in their spending should debt service continue to creep higher. Now, in that environment, we continue to favor our shares of Costco, Amazon, McDonald's, and PepsiCo.

Now, let's turn to tomorrow's jobs report. Leading into it, we've taken a hard look at the August flash PMI data, the July JOLTS report, the August Challenger job cuts report, and this week's August ADP employment report. Putting them all together, we see signs that yes, the labor market is cooling and the odds of an upside surprise in tomorrow's August employment report is limited.

This also suggests that the risk of an upside surprise in wage gains found in that report are limited as well. If that's what we get, the market is likely to see it as a positive sign. And more likely than not, expectations for one more Fed rate hike will fall even further.

However, we have to remind you that we still have a bunch of data to come, including the August CPI data and the August Service Sector PMI data. Remember, the Fed has been far more focused on inflation in the services economy. So while the odds of another Fed rate hike are falling, we have further to go before completely ruling it out.

Shifting gears, in case you missed it, yesterday we upgraded the shares of Marvell to a 2 from a 3 rating. And we have much more detailed comments in that alert. But quickly, following the company's earnings, we shared that we were waiting to see if a technical gap was filled or if there was more downside risk to be had in the shares.

Good news, the gap was filled, reducing the downside risk. And that led us to upgrade the shares given the recent reported strength by Marvell both in data center and AI. Now, this raises the next question. Well, if we have a 2 rating and our price target is 62, what are we thinking about our price target?

Well, the next known catalyst for that will be the August revenue report from Taiwan Semiconductor, which should be out next week. Now, we say this is the next catalyst because data center is Taiwan Semi's largest end market closely followed by smartphone. And that, of course, means that the report from Taiwan Semiconductor will be one that we're watching also with an eye for our shares of Apple, Universal Display, and Qualcomm.

And finally, for those members that like dividends, Deere announced a fresh 8% increase to $1.35 dividend per share for its next payment in November. More details were shared in our opening comments this morning. But let's think of it this way. Given the expected recurring nature about dividends held by investors, we see this as simply another positive indication for the company's prospects for both the ag and construction equipment markets as well as margins and cash flow.

Now, Deere shares have rebounded rather handsomely from the recent pullback to 385. And barring any new developments or data, we would look to revisit our current one rating above 430. Now, that'll do it for today's rundown. J.D. will be back tomorrow with a look at the jobs report and much more with AAP team member Bob Lang. Have a great day.