Morning Seeds

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Morning Seeds • 09/25/2023 - 9:35 AM EST

Equities Digest Higher-for-Longer

Friday ended another bad week for stocks with the SPX closing down slightly for the day and for the third week in a row. It was a broad-based fall last week with all sectors closing down. For the month, now, the SPX is down -4.2% as we head into the final days of Q3. Investors are still adjusting to a world of higher-for-longer post the FOMC rate decision and commentary. With higher rates applying pressure to equities, good economic news in the coming days and weeks will likely be viewed badly.

AI Platform Deepening

Amazon this morning announced a tie-up and investment agreement with Anthropic, the company behind ChatGPT competitor Claude. Amazon will invest $1.25b now and up to $4b over time while Claude will shift its cloud platform to AWS and presumably become the generative AI interface for Amazon’s broader retail and enterprise LLM ambitions. Amazon is highlighting its capabilities for managed services with its “Bedrock” training offering. With Microsoft’s various integrations of OpenAI offerings, Google’s ‘Bard’ expansion, recent focus on Tesla’s developing ‘Dojo’ training offering and on Meta’s post-Llama capabilities, we believe that a phase of AI platform deepening and integration is well underway. We are also watching carefully for details from the now nearly settled writer’s strike to see how the settlement treats AI protections, with preliminary reporting indicating that studios are granting prohibitions rather than integrating a royalty regime or the like into training paradigms. We believe this may be an important clue into how developed the instinct to ban usage amidst IP uncertainty may be.

Shutdown Showdown

We believe this week will likely bring substantial theatrics in Congress given the threat of an imminent shutdown, but that these will likely be more optics than substance. Given the hardened stance of the House Freedom Caucus – as well as air cover from Trump who has urged congressional Republicans to shut down unless they “GET EVERYTHING” (intentional caps) – Speaker McCarthy has to contend with the prospect of requiring Democratic votes to either pass a CR or re-open the government following a shutdown (as well as potentially to sidestep a motion to vacate). While last-minute maneuvering remains possible, this congress faces incentives to actually shut down as opposed to taking a bluff to the limit, somewhat distinct from prior standoff episodes. We don’t believe there will be substantial economic fallout from a brief shutdown, although the spotlight on dysfunction will impede perceptions of fiscal sustainability and potentially weigh on the long end. There is modest risk of an elongated shutdown given the levels of intransigence and rancor.

Credit Quality Dispersion

We will get data this week on housing sales and consumer credit, with mortgage data likely to reaffirm the affordability gap evident in the economy. As housing and automotive price growth over the past two years significantly outstripping income growth, access to financing for big-ticket consumer items continues to worsen. One automotive service, for example, reports that 44% of consumers cannot afford a car given the increases in the used car market and high financing rates for all but the best credit scores (for whom auto financing is actually subsidized). As the market accepts a higher-for-longer rate environment, a similar phenomenon is taking place in corporate credit. We are seeing an uptick in distress and over-levered companies are suffering whereas credit spreads overall are barely moving and levered loans trade relatively well. We view these phenomena as reinforcing a flight to quality, including low-vol stocks and credits.