TJX and Target Earnings Look Strong. Why That Points to Higher Fed Rates.

That encapsulates a problem for the Federal Reserve. Target isn’t alone in predicting tougher times ahead. The thing is, lots of people have been predicting a slowdown for a while now, or even a recession. It just hasn’t materialized.

The Fed minutes show some officials are still concerned the economy could weaken. Yet, with the central bank having abandoned its own predictions for recession, most were still behind last month’s quarter-point rate hike.

The argument in favor of raising rates is that a stronger economy will keep putting pressure on inflation, even though the inflation rate looks pretty well-behaved for now.

Retail sales jumped 0.7% in July. The Atlanta Fed’s GDPNow tracker—a computer model of the economy designed to give real-time estimates of expansion based on incoming data—is pointing to a whopping 5.8% growth reading for the third quarter. That’s way above what the Fed, or anyone else, is realistically predicting.

Recent data should certainly be taken with a grain of salt. But any way you slice it, a data-dependent Fed looks certain to keep rates higher. That’s what’s behind the yield on the 10-year Treasury rising to the highest since 2008.

And it’s also what’s behind the recent poor performance of stocks. Higher bond yields and Fed rates are toxic for shares. It’s a lot for investors to digest over the coming months.

—Brian Swint

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Try your hand at this morning’s Barron’s crossword puzzle and sudoku games. For all games, including a digital jigsaw based on the week’s cover story, click here.

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Minutes Persuade Wall Street That Tightening Is on Pause

At least a couple of members of the Federal Open Market Committee favored keeping interest rates steady at their July policy meeting, but most officials saw a continuing “significant” risk from inflation, according to the meeting minutes. Instead, they raised by another quarter of a percentage point.

• At least two policy setters leaned toward leaving the target range for rates unchanged or indicated they could have supported such a proposal. That group noted they could make further progress pushing inflation to their 2% target and evaluate the effects of the previous increases.

• Still, almost all favored raising rates. Policy makers are still grappling with an unusual level of uncertainty regarding the economic outlook, and most continue to see risks to inflation that could require additional interest-rate increases.

• The Fed sees some positive signs. U.S. economic activity is expanding at a moderate pace and it isn’t forecasting a mild recession anymore.

• Wall Street continues to bet the Fed is done. The probability that the central bank keeps the benchmark rate steady in September was at 88.5% after the minutes were released, according to the CME FedWatch Tool.

What’s Next: The mixed views about economic prospects and the split on how much more policy tightening is still needed will sharpen the focus on the Fed’s Jackson Hole, Wyo., conference next week.

—Megan Leonhardt

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Taking Stock One Year After Passage of the Inflation Reduction Act

One year ago this week, the Biden administration and Democrats on Capitol Hill pushed through the Inflation Reduction Act—a broad federal spending plan chock-full of energy incentives and tax savings for individuals and businesses—on top of a big infrastructure spending package.

• Fans of the IRA cheered the $121 billion in direct spending and $235 billion in tax credits on government efforts to speed the energy transition away from oil, including incentives for adoption of electric vehicles.

• Republicans want to promote greater U.S. energy independence, including domestic oil and natural gas production alongside private-sector growth for wind, solar, nuclear and hydrogen. The GOP is primed to slash the IRA’s green spending should they win a majority in 2024.

• Households have access to the IRA’s incentives for 10 years, according to groups that help calculate how much homeowners and renters can save on energy and climate impact by tapping them. The Internal Revenue Service also offers its own guidance on IRA credits and deductions.

• Treasury Secretary Janet Yellen told a gathering of union members in Las Vegas this week that since January 2021, companies have committed more than $500 billion in manufacturing and clean-energy investments.

What’s Next: The IRA also provided funding for the Internal Revenue Service, though some was later pared back. Still, the IRS said it has made progress. It is expanding its capacity to call back customers and soon taxpayers will be able to respond to 51 types of notices and letters online, up from 10 now.

—Liz Moyer and MarketWatch

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China Attempts to Alleviate Fears of Economic Slump

China’s Premier Li Qiang said in a speech Wednesday that the country will work toward meeting its annual goals. He set out measures to achieve targets in what many will see as an attempt to alleviate fears of an economic slump. The Shanghai composite finished 0.4% higher.

• He said the government will focus on “expanding domestic demand” by tapping into consumption and pro-investment policies, and promoting the consumption of big-ticket items, according to the state-media outlet Xinhua News Agency.

• The world’s second biggest economy has struggled to boost growth amid a disappointing rebound from Covid-19-era lockdowns. Tuesday its central bank lowered interest rates after fresh data showed consumer spending and factory output weakening.

• Li also spoke of building a modern industrial system and efforts to “accelerate the transformation and upgrading of traditional industries with new technologies and business models.”

What’s Next: While the premier noted the challenges facing the economy and stressed that the government will remain resolute and confident, according to the Xinhua report, investors will want to start seeing results in the coming quarters. There was also no mention of support for China’s struggling property sector, which is key for growth.

—Callum KeownandRupert Steiner

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Cisco’s Orders Rebound, as It Eyes Multiyear AI Opportunity

Cisco Systems
showed signs of improvement in its product orders as fourth-quarter earnings topped its own forecast for revenue and profit but its outlook for fiscal 2024 came in below Wall Street estimates.

• The computer networking company’s revenue rose 16% from a year ago. Operating cash flow rose 62% and gross margin improved by 2.6 percentage points to 65.9%. Its largest division recorded a revenue gain of 33%.

• Cisco forecast first-quarter revenue of between $14.5 billion and $14.7 billion, which would be a gain of 7% from one year ago at the midpoint and in line with the Wall Street consensus. For the full year, Cisco is projecting revenue of $57 billion to $58.2 billion.

• CEO Chuck Robbins said product orders rose 30% from the third quarter, with double-digit increases in all customer markets. Robbins said that was above historical order trends of 18% to 20% sequential order growth.

• Robbins also said Cisco has had a cumulative $500 million of orders to date—not specifically in the latest quarter—related to networking hardware used for generative artificial intelligence applications, most of that from the large cloud players.

What’s Next: CFO Scott Herren told Barron’s that AI-related business will meaningfully show up in the company’s financial results by the end of fiscal 2024, referring to “encouraging signs.” Cisco sees a multiyear opportunity ahead in AI, he said.

—Eric J. Savitz

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With U.S. Steel in Play, Musk Has Chance at X Ticker Symbol

With potential bidders swarming around
U.S. Steel,
a famous stock ticker symbol could become available. The steel giant, created at the turn of the 20th century by Andrew Carnegie and the banker J.P. Morgan, has traded under X since 1921. A takeover could give Elon Musk the chance to swipe his favorite letter.

• U.S. Steel was the first American $1 billion company and the symbol of its economic might for decades. It is now considering options after offers from
  Cleveland-Cliffs
  and Esmark.
  ArcelorMittal
  could jump in, too, Reuters reported. ArcelorMittal didn’t respond to a request for comment.

• Musk owns several privately held companies including X, his new name for Twitter, and has an affinity for the letter. His commercial space firm is called SpaceX. One of Tesla’s models is an X. One of Musk’s sons was named X. It’s also the unknown variable in algebra.

• NYSE lists 21 single-letter tickers, including F (
  Ford
  ), K (
  Kellogg
  ), M (
  Macy’s
  ), and W (
  Wayfair
  ). It wouldn’t be the first time a company swooped in to take over a symbol.
  Citigroup,
  fresh from its merger with Travelers in 1998, snapped up Chrysler’s C after the auto maker’s merger with Daimler.

• But a single-letter ticker doesn’t guarantee strong stock market performance. AT&T, Ford, Citi, and Macy’s are longtime laggards.

What’s Next: A potential ArcelorMittal bid for U.S. Steel would seem to be an about-face. The Luxembourg company exited the U.S. steel market back in 2020, selling its U.S. operations to Cleveland-Cliffs. ArcelorMittal still owns Canadian steel maker Dofasco.

—Andrew Bary and Liz Moyer

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Plane tickets keep getting cheaper, even as price levels creep up again in the broader economy. But the cost of flying won’t stay down for long, economists say.

Airfares dropped by 8.1% for the second month in a row in July, and tickets were 18.6% less expensive than they were at the same time last year. That helped dampen inflation levels, even as U.S. consumer prices rose slightly from 3% to 3.2% in July.

Several economists expect a jump in airfares soon, however, citing an increase in the price of oil at the end of July and in the first week of August.

Read more here.

—by Nicole Greenberg

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner