Morning Call 9/10/26

0:00At Edward Jones, we believe rich is more than caring about the latest and greatest. It's also taking care of what gives your life meaning. That's why your dedicated financial advisor meets you where you are, with personalized financial strategies that help protect what matters, so you can preserve your progress while creating a path forward. The key to being rich is knowing what counts. Let's find your rich together. Edward Jones, member SIPC. Pro save big with early Black Friday deals at Lowe's. Shop new select DeWalt 20-volt max nailers under$350 for a limited time, like the 18-gauge Brad nailer.

0:43Now just$269. Plus, get up to 50 % off select ladders. With deals like these, it's easy to keep your jobs moving all season long. Get Black Friday deals early at Lowe's, in-store and online. Valid through 1118, while supplies last. Selection varies by location.

1:00Morgan Brennan: A$5 ,000 promise from the president. I'm Morgan Brennan, and this is your Morning Call.

1:19Morgan Brennan: Good Thursday morning. Let's get a check on U.S. stock futures with the major averages riding a three-day losing streak. You can see attempting a bit of a rebound here this morning, pre-market. S &P is poised to open higher by five points. The Dow up 87 and the Nasdaq under a bit of pressure here this morning. Premarket again poised to open lower by 66 points. Now, Treasuries, this has been the big story, what we're seeing in the bond market following yesterday's$6 billion Treasury Secretary Besant buyback announcement. Today, we're also going to get August PPI. We're also going to get a 30-year Treasury offering, too.

1:53Morgan Brennan: So you can see that yields are continuing their climb here this morning. 10-year Treasury yielding 4.859 percent. We are trading right around the highest level since November of 2023. Fed-sensitive two-year Treasury 4.44 percent now, and the 30-year Treasury 5.31 percent. If we take a look at the dollar index, too, the dollar has been weakening against other major currencies. You can see dollar index level right now 98.77 as we touched a multi-month low in trading yesterday. The real focus here has been dollar yen. Yen is at about 153 per dollar this morning. Energy, as well as we see crude continue its climb, we're now, yesterday, closing at the highest level since May of 2022 and moving higher from there.

2:36Morgan Brennan: So WTI is up about 1.4 percent right now, trading around$97 a barrel. Brent is up 1 percent, trading at$102 a barrel. Let's see how Europe and Asia are shaping up ahead of a major central bank decision later this morning. Steve Sedgwick is in London with all of it. Steve.

2:55Morgan, lovely to see you. Will Asian equities? They close largely in the red amid those renewed shipping strikes in the Strait of Hormuz, keeping the Brent handle just above$100 a barrel. Japan clawing back some early losses to end Thursday trade in the green. Those markets, of course, in focus amid continued yang strength. Well, let's take a look at Europe. Similar picture here in Europe. We've had a very much down week so far. France's CAC 40 index outperforming the rest, though it's mostly a risk-off mood on this side of the pond this morning, with tech stocks the biggest declining sector.

3:28All eyes on the ECB. We are almost certainly going to get a central bank delivery of 25 basis point rate hike, taking its headline deposit facility to 2.5%. This is oil prices, as I say, hit the$100 mark yesterday for the first time since July, raising concerns about higher for longer inflation. But the ECB's future rate path remains unclear. According to the ECB Watch tool, All markets are largely pricing in a further 25 basis point rate hike in October, followed by a larger 50 basis point rate hike at the meeting in December. And of course, the big story on this side of Atlantic as well, Morgan, is that$5 ,000 that every American adult will potentially be getting if the Republicans clean sweep.

4:10I'll be coming to you to borrow some money. Back to you.

4:13Morgan Brennan: Deal. Steve Cedric. Thank you. All right. Well, turning to the tech trade with the Nasdaq riding a three day losing streak. Big news this morning from the world's largest contract chip maker, Taiwan Semi, seeing sales in August surged 53 percent to a record all-time high. That surpassed street estimates as it struggles to meet market demand. Sales are now up four months running for a company that counts NVIDIA, Apple, Broadcom and more as key customers. Nonetheless, you could see shares basically finishing flat overnight. Speaking of Apple, checking on shares following yesterday's iPhone debut.

4:46Morgan Brennan: the company's first foldable phone and the first hardware unveil event under new CEO John Ternus. Apple also announcing a new iPhone 18 Pro, AirPods 5 and Apple Watch Series 12. Also some price hikes, although maybe not as high as some might have anticipated. All of this ahead of key earnings reports from Oracle and Adobe after the close today. Oracle shares, by the way, down 19 percent since the last report three months ago, down more than 50 percent from the 52-week high that was hit back in September of last year. A lot to dig into here. So joining me now on this and more is Chris Gennady, Global Head of Research at Wisdom Tree.

5:21Morgan Brennan: Chris, it's great to have you on. We've got to start with Apple. Stock finished fractionally lower this morning, but it's bouncing higher here pre-market. Overall sentiment seems to be that this was a very strong first event from John Ternus. Your takeaways. Absolutely. I was paying particular attention to a lot of the hardware focus because in thinking of the difference between Tim Cook and John Ternus, He has this hardware background. It was fascinating to talk about. I know you just mentioned Taiwan Semiconductor. They're running this iPhone 18 series on the two nanometer process technology, which is a cool step forward.

5:57They talked about the different GPUs embedded in the chip, the custom design, the neural processing units. It was rather impressive across the board, and I'm pretty excited to see or to start seeing live versions of that foldable phone there. It looks pretty cool.

6:15Morgan Brennan: I mean, called the Duo, I think some of the initial takeaways I've seen is that the phone is very thin yet sturdy. You think this is going to drive sales for iPhones? And if so, do you think the full potential here is factored into the stock right now? it's fascinating to consider a moment that we are basically 20 years into the iphone it was first unveiled by steve jobs back in 2007 and so we're approaching 2027 if you can believe it uh the business of the iphone since 2011 has been fairly stable from the standpoint of there so many different versions of the chart where you see apple basically sells roughly 250 million units of the iPhone every year.

7:03People are estimating that this new phone in the last three months of this year might be an incremental 10 to 15 billion added to revenue, which is an exciting initial debut. But when you're already selling every single year, almost like clockwork, something around 250 million, and it hasn't changed much for 15 years, we just have to all keep that in the back of our mind.

7:25Morgan Brennan: OK, I do want to shift gears to the earnings we're going to get after the bell today. Oracle, which obviously continues to see a lot of demand, but they're so exposed to open AI. They have so much debt. So question marks about that. And then Adobe, which is going to be the next key test on the software side. Absolutely. The thing that we've seen this fall, Morgan, is that the software has really been coming back. The cybersecurity area of software has been particularly strong. I love to think about how Adobe has that photographic sort of provenance. I know after an iPhone event, you're always thinking of the pictures and using the pictures.

8:03And a lot of people are sort of thinking about AI image generation. And a lot of people forget. They sort of think of the Adobe PDF and reading documents. But Adobe is so much more than that. And they have this service that allows you to really know how an image was generated. Do you have the rights to that image? So it's a company that it's done an incredible share buyback. It's almost like a sleeper value stock that if people appreciate these additional details could really be unlocked.

8:34Morgan Brennan: Okay. And finally, quickly, I do want to get, as I look at your notes here, I want to get your big idea, especially because that idea is tied to an event and a company, a CEO that actually I spoke to just earlier this week. The INQ Investor Day, yes. It's a passion project of mine. I follow quantum computing developments in 2026. To be clear, we don't yet have the full machine, but INQ put out as part of their Investor Day some rather interesting research about what it would take to have a quantum computer that can challenge the security of signing different Bitcoin transactions. They're preparing to deliver 2027, 256-qubit machines.

9:21They've got their Skywater acquisition, which is their sort of vertical integration, making the actual chips going strong. So it was a great sort of proof point in an emerging sector.

9:34Morgan Brennan: All right, Chris Gennady, great to have you on. We covered a lot there to start the hour. Appreciate it. Thank you. We've got a lot more to come here on Morning Call as well, including. If the Republicans win the House of Representatives and the United States Senate, both of them, because of our tremendous strength and success economically, I will issue a dividend to every adult citizen in the United States of America for$5 ,000.

10:08Morgan Brennan: President Trump's call for$5 ,000 dividend payments to all American adults with some caveats. what that actually could look like, what it means. Plus, a one-on-one with autonomous defense leader, defense tech player, Aero Vierman. As those shares pop here pre-market, they are up about 6.5%. And later, affordability on the campaign trail. We're going to be looking at one battleground state for hits to November. We've got a very busy hour still ahead. One Morning Call returns.

10:40I love that my SanDisk USB-C flash drive makes it easy to share our work. without an adapter, internet, or the cloud. So we can make our presentation about...

10:59SanDisk USB-C Flash Drive. Share work easily across USB-C devices. Terms and conditions apply. Visit sandisk.com for more information. Weren't agents supposed to take things off your plate? Building another to handle the others is a bit much. Don't make more work out of work. Gemini is the one agent that knows all parts of your business and actually gets stuff done. You give it a project, close your laptop, and when you come back, the job's finished. No matter your industry or role, your agent has the skills to help every team stay in their flow. Seriously, make work less work with Gemini on Google Cloud.

11:36Check response, subscription required. This holiday, all plans, even unlimited, are just$15 a month. A holiday deal this good obviously deserves an enormously expensive holiday song, like All I Want. Right. Okay, we can afford that. You know what? Forget the music budget. We're going to stick with whatever's in the public domain. Give it a try at mintmobile.com slash switch. Upfront payment of$45 for three months,$90 for six months, or$180 for a 12-month plan required,$15 per month equivalent, taxes and fees extra. New customer offer for initial plan term only. Greater than 50 gigabytes may slow when network is busy.

12:07See terms.

12:10Morgan Brennan: Welcome back. We're checking shares of AeroVironment, which are popping 6.5 % right now pre-market. That's after the company reported fiscal first quarter adjusted earnings that easily beat estimates on higher sales of its autonomous defense systems. The firm ending the quarter with a funded backlog of$1.5 billion. It's also reaffirming guidance for the full year. Record revenue for the quarter. Joining me now in a first on CNBC interview is AeroVironment Chairman, President and CEO Waheed Nawabi. He will also be making a presentation at the Jefferies Global Industrials Conference later today and joins us here first.

12:39Morgan Brennan: It's great to have you on set. Great to be with you, Morgan. All right. So you had a record quarter. Defense demand continues here. What's driving it? What does that mean for Air Environment? Well, Morgan, we've had record revenues, record backlog, record bookings, amazing set of results this quarter, all fueled by a systemic, fundamental demand drivers that is just global, not just U.S., but global. We are the company that have the right solutions for the kind of problems and challenges that our military and our allies are in need of. We have the production capacity that allows us to be able to scale and produce today and deliver fast.

13:18And we have the battle proven solutions that have actually been tested, validated, and has worked in several conflicts around the world. And so when you combine all those things together with the economics of the solutions being at a fraction of the cost of comparable traditional legacy systems, it just gives us a position in the market that is really unique. And I've not felt this or experienced this in my decade and a half experience at AV ever before. We are positioned better today than ever before in my career at AV.

13:51Morgan Brennan: Yeah. I mean, there's so much focus on drones and drone warfare also increasingly, and something we've talked about before, counter drone technologies too. And you're very acutely positioned for all of this. So when I see things like contracts going out for your laser system, locusts, which I've seen in person with you out in California and we've talked about before. How quickly can that be delivered? And what does that mean when you talk about drones attacking ships in the Strait of Hormuz? So the fundamental issue that exists is that nobody thought before Ukraine conflict and the epic fury that countries like Iran could shoot these$150 ,000 drones by thousands, if not tens of thousands.

14:33And the economics of solving that or addressing that threat is just not sustainable. We're shooting million dollar missiles at$150 ,000 drones. So the solution that we have developed called Locust, which is the first ever full rate production contract by the U.S. Department of War for our Locust system, the program called eHell, we received a half a billion dollar nearly program, a record award literally last month. And it basically positioned us to provide the U.S. military and our allies a solution that just basically cuts the cost of a system from millions of dollars per shot against these drones to less than$10 per shot, number one.

15:20Number two, the ability to shoot these things with almost an unlimited magazine. Meaning as many drones come our way, as long as I have power, just electricity, you could zap these things from the air. Those two fundamental advantages makes laser weapon systems a paradigm shift in military warfare and in defense systems. And so we've got, we're expanding a factory in Albuquerque, New Mexico. We're delivering those today. We've also announced our first international contract for a U.S. ally internationally. That is just the initial of several more customers that we're working with. We're at an inflection point.

15:59This is the same thing as what we saw in Ukraine conflict, how drones played a massive, massive role in changing the paradigm in warfare. Nobody thought that small drones could cause this much havoc in the battlefield. Now the conflict is about how do you defend against these drones? How do you defeat these drones at economics that is affordable, sustainable, but it's also something that you can do them in volume? Directed energy system has been a technology that has been chased by U.S. military and our industry for three plus decades. And we're the first company now that actually have delivered operational systems to the southern border, to the Middle East and to other parts of the world at scale and at reliability that actually works today.

16:49Morgan Brennan: And so when we see things like U.S. Navy escorts of tanker ships to the Strait of Hormuz, it's going to be this type of technology that's deployed. It sounds like perhaps even deployed in real time right now that's enabling some of these cargoes to make their way through the strait. That is true. it's been interesting because defense stocks, not only since the start of the year, but since the start of the Iran war, have actually sold off pretty aggressively, including aero environment, despite what the fundamentals are suggesting in earnings reports right now. Investors seem to be very focused on midterm elections here in the U.S.

17:19Morgan Brennan: and whether we're at peak defense spending. So given the fact that we are on continuing resolution, how much does this factor into your outlook here? And how also, perhaps just as importantly, should investors be factoring the international sales piece of it? Like I said, what an inflection point. We've got a whole set of solutions from multi-mission and, you know, intelligence, surveillance, and reconnaissance drones to lethal drones, one-way attack drones, like loading munitions such as switchblades you've seen, to counter-drone technologies, which is RF jammers, also our Locust laser weapon systems, and our latest new missile system that is called Freedom Eagle One that's precisely targeted to drone threats.

18:06And we have direct energy and space systems that is essentially the sweet spot of what is really desperately needed in our national security needs, as well as with our allies. So this is not a short-term, one-time demand signal. This is a prolonged, sustained demand profile that is going to change and it's going to stay around for decades, in my view, at least a decade. And AV is positioned very, very well for this because we have the solutions that our military needs. And it's the same thing that our military needs all of our allies need around the world. The international demand is really misunderstood or undervalued.

18:47And that's why, as you said, I truly believe that there's a huge disconnect between the fundamentals of our business, the demand drivers for our business, the position that we have in the market, the track record of success that we've had, not just this quarter, but the last couple of years, and then in the future, versus the value of our company. And so I think this disconnect eventually is going to solve itself, and hopefully sooner rather than later. And we're positioned really well. I mean, I've not experienced this type of a positioning and market demand dynamics for our business ever since with the company.

19:23It's been almost 15 years now.

19:24Morgan Brennan: Yeah. I mean, speaking of experience, I do want to, as we are on the eve of the 25th anniversary of September 11th, I do want to get your thoughts on how national security has evolved over this time. Well, obviously, one of the fundamental things have changed, in my view, is the Ukraine war changed the conflict in terms of the paradigm shift of what drones and lethal drones can do. Now it's about how do you defend against those things. And laser weapon systems, I believe it's a multibillion-dollar market that is going to make a huge difference. Almost every critical asset or infrastructure you can imagine, hydroelectric dams, nuclear power plants, airports, runways, military sites, air bases, military munition depots, vast, vast majority of critical sites, not only in the United States, but our allies, need to be protected against these new weapons and new threats.

20:20Laser weapon system has a unique technological advantage and value proposition. And that's going to play a huge role in this whole thing. The militaries of the world not only are going to have to worry about how can I buy something to fight drones or have more drones or laser weapon systems, But it's also how do I institutionalize this into my military architecture and force structure that we keep up with the innovation cycle? These things are improving on a constant basis. No longer is it sufficient to say I've got the latest, greatest widget in military. It's not only do I have the latest, greatest.

20:59How do I keep up with the innovation cycle? that if I have this today, a year from now, two years from now, I can keep up with the innovation cycle that is improving the capability that we go forward. This is fundamental to our product design. It's fundamental to this industry's dynamics now that's actually changing the whole landscape, and it's going to be critical, and the companies are going to end up winning.

21:20Morgan Brennan: Waheed Nawabi of Air Environment, it's great to have you here on set. Appreciate it. Great to be with you, Morgan. Well, straight ahead, the growing chorus of former AI engineers sounding the alarm over unchecked AI development. And first, though, checking shares of American Eagle, the retailer's second quarter profit beating estimates. But much of that growth was driven by something we've been talking about this entire earnings season, tariff-free funds. Same-store sales missing forecasts, down 6%, though sales at its Aerie brand jumped 25%. Merchandise margins fell, likely due to heavy promotions at its namesake American Eagle brand.

21:55Morgan Brennan: Shares are down 11 % right now. We'll be right back. Weren't agents supposed to take things off your plate? Building another to handle the others is a bit much. Don't make more work out of work. Gemini is the one agent that knows all parts of your business and actually gets stuff done. You give it a project, close your laptop, and when you come back, the job's finished. No matter your industry or role, your agent has the skills to help every team stay in their flow. Seriously, make work less work with Gemini on Google Cloud. Check response, subscription required. This holiday, all plans, even unlimited, are just$15 a month.

22:31A holiday deal this good obviously deserves an enormously expensive holiday song, like All I Want. Right. Okay, we can afford that. You know what? Forget the music budget. We're going to stick with whatever's in the public domain. Give it a try at mintmobile.com slash switch. Upfront payment of$45 for three months,$90 for six months, or$180 for a 12-month plan required,$15 per month equivalent, taxes and fees extra. New customer offer for initial plan term only. Greater than 50 gigabytes may slow when network is busy. See terms. The real cost of a break-in isn't your valuables. It's the feeling that your home stopped being safe.

23:02SimpliSafe keeps danger away from your family with three layers of protection. One, smart AI cameras and live U.S.-based agents help stop intruders before they break in. Two, we sound the alarm at points of entry. Three, our agents request emergency response. Plan starting around a dollar a day. Right now, get 70 % off your new system with professional monitoring at simplisafe.com. Outdoor deterrence plans start at$49.99 a month. Visit SimpliSafe.com slash licenses for alarm license information.

23:29Morgan Brennan: Welcome back. Developing story Axios out just moments ago with a report that a Republican-led Senate subcommittee is opening a probe into OpenAI in the hugging face breach from back in July. Senator Josh Hawley, chair of the Senate Homeland Security and Governmental Affairs Subcommittee on Disaster Management, describing OpenAI's handling of the situation as, quote, reckless. The reported probe follows a string of former AI engineers who are sounding the alarm over unchecked AI development. The latest from former OpenAI researcher Steve Adler in the New York Times overnight saying, quote, without a speed limit, both OpenAI and Anthropic are pursuing dangerous recursive self-improvement strategies, which enlist AI models themselves to design and train their own successors.

24:11Morgan Brennan: Let's bring in CNBC senior technology correspondent Arjun Karpal with more. Arjun, it's great to have you on. And that's where I want to start right there, because recursive self-improvement is exactly where all of this debate and discussion now seems to lie.

24:29Yeah, you're exactly right, Morgan. I think the people are obviously concerned about the current state of AI models. And you mentioned the Hugging Face app and this was a hack. And this was really about these open AI agents that had effectively gone rogue and hacked Hugging Face. But the next frontier many people see is exactly what you mentioned there, recursive self-improvement. The idea that AI models can actually train themselves and improve themselves with very little human intervention. And the growing concern around that is that you could get to a point where AI models begin to do things that humans no longer are in control of or have oversight of.

25:05And that means that there is a higher chance that these AI models are able to go rogue or do things that were not intended by the developers of the models. And that's really when you're hearing some of the commentary over the last 24, 48 hours about extinction events, that AI could eventually kill all humans, which we heard from an employee over at Anthropic. I think this is what they're specifically talking about here is these improved models based on RSI with very little of a human sight.

25:37Morgan Brennan: So in light of this, this gets to the heart of what has become a geopolitical and global debate. And that is how do you regulate it? How do you put guardrails in place, especially if competitors and the case we're talking about the U.S., but competitors such as China maybe aren't?

25:56Yeah, it's a great question. And I think there's this tension going on right now with the fact that you've got very highly valued, very competitive frontier labs over in the US in the likes of OpenAI and Anthropic trying to outcompete each other at the same time, trying to fend off challenges from China. That's the reality of the commercial environment. At the same time, they're developing these very advanced models. So it's very hard for them to slow down when they're trying to one up their competitors. And that's really the challenge here, I think. for a long time, the development of AI so far has really been done with very little oversight, very little regulation and very little involvement from the government.

26:34But now I think there is a growing cause about regulation, about the need to regulate and have oversight of exactly how these frontier labs are developing their models. What are the inputs and what are the potential risks that come out of that?

26:48Morgan Brennan: Yeah. Growing so fast, perhaps not paying enough potential of prioritizing some of the security along the way. That is the debate and the very real risk here, not only for investors, but for the public as well, and why we're having this discussion. Arjun Karpal, it's great to have you on to talk about the blowback from these AI lab leaks. Well, still on deck, a Texas-sized coup reportedly making its way from New York to Dallas, and the stock at the center of it all. Morning Call continues next.

27:20Morgan Brennan: I'm Morgan Brennan. Welcome back to Morning Call. Let's get a check on U.S. stock futures after another down day for the major averages yesterday. You can see attempting a bit of a rebound here this morning. Pre-market Dow points open up 45 points. S &P basically flat, flat to the upside here at one point. And Nasdaq under pressure this morning, down 100 points. Energy as crude continues to climb here, which is factoring into what you're seeing in stocks this week. That continues. WTI is up about one and three quarters percent. It's trading just below 98 bucks a barrel now. And Brent crude is up about one and a half percent, trading around one hundred and two dollars a barrel.

27:58Morgan Brennan: Similar situation in the Treasury market as well. We'll get into that in just a moment. But first, let's check on some of the morning's latest headlines. The Department of Justice is reportedly investigating whether a recent deal between NVIDIA and Grok was set up to avoid antitrust scrutiny. New details in, so you can see those shares of NVIDIA are basically flat right now. Meantime, though, new details in the deadly Miami Amazon jet crash. The NTSB says one of the cargo plane's pilots tried to abort the landing shortly after the plane touched down on Sunday. Now, this is according to audio from the Cothpix voice recorder indicating that the plane was going too fast.

28:33Morgan Brennan: And Elon Musk's boring company securing new financing this morning to the tune of$3 billion backed by the UAE, Barron Capital and others. The deal values the company at$23 billion. And pipeline giant Energy Transfer is reportedly planning to move its primary listing from the New York Stock Exchange to the Texas Stock Exchange. Transfer is worth roughly$75 billion and would be the biggest company so far to swap its primary listing location to Texas from New York. Nike is reportedly trying to reassure investors and its own employees about the future of its business ahead of its removal from the S &P 100 index for the first time in 18 years.

29:14Morgan Brennan: According to a memo seen by Bloomberg, the company is telling executives the removal does not affect its business strategy or operations and that it plans to remain a part of the S &P 500 index. No official comment from Nike on that. Well, to Dallas, Texas, and new worries for bond investors and the U.S. deficit spending ahead of the midterm elections after President Trump last night promised what he's calling a Trump dividend to all U.S. adults. Here's what he had to say last night. If the Republicans win the House of Representatives and the United States Senate, both of them, because of our tremendous strength and success economically, I will issue a dividend to every adult citizen in the United States of America for$5 ,000.

30:09Morgan Brennan: With some 270 million U.S. adults ages 18 or older, that amounts to a one-time payment of $1.35 trillion, 4 % of total U.S. GDP. Devil's in the details, though, if that were to actually happen. The president's comments coming after Treasury Secretary Scott Bessent announced plans yesterday to buy as much as six billion dollars in long term debt, higher than previous commitments by the Treasury, but lower than the street was expecting, the eight to ten billion dollars that some on Wall Street were anticipating. Bessent last night also became the first sitting Treasury secretary in half a century to speak at a national political convention, praising Trump's economic progress while saying Democrats, quote, brought this country to the brink of ruin.

30:49Morgan Brennan: These are comments that are now turning heads on Wall Street as he looks to calm Treasury market stress. Joining me now is Max Kentner, chief multi-asset strategist at HSBC Bank. Max, we're seeing Treasury yields move higher again this morning, 10-year Treasury at a level that we haven't seen since November of 2023. How much is hinging here on that intersection of policy and how investors are reading its credibility? Yeah, look, it depends which market we are looking at. I think on the rates market, certainly the commons around perhaps even more fiscal deficit that we've heard from President Trump yesterday, I don't think that would help to calm down nerves.

31:31I think that's a pretty risk-free statement if I say that. So if we were ready to see another$1.3 to$1.4 trillion spending, and that, of course, would increase the deficit even more, I think that'd be probably the last thing that we need right now in order to calm down bond market nerves. Sure. But on the other hand, I think one thing when we look at the equity in the credit market is we've already seen those effects. We've already seen effects really from higher yields. You look, for example, at the S &P 500 PE ratio, the price to earnings ratio last year hit a high in the second half of 23.2.

32:07We've just hit 19.2. So we've derated, we've compressed a full four PE points. When you look at high yield credit, you look at the credit markets, the worst credit. So when you look at triple Cs and high yield, they've only been trading at 550 basis points only around six months ago. We're almost hitting 900 now. Bear in mind, from 1 ,000 basis points onwards, we're starting to describe that as distressed. So we're not far off from that level. So to everyone who's saying, look, everything's so calm, we're not really seeing an effect. We are seeing the effect. They are just a little bit under the hood.

32:40There may not be on the equity on the price level because the earnings are so strong. So I don't actually think, particularly on the risk asset, on the equity side, the yield side of things is the big, big worry. I think the bigger worry is on the earnings. What happens if these historic earnings beat rates that we've seen? What if they actually start disappointing a little bit?

32:59Morgan Brennan: I mean, that raises a key question. That is, how is an investor position right now then if you have all of these macro undercurrents playing out at the same time? Yeah, we're still very bullish. In fact, we can't be more bullish on equities. We are maximum overweight on equities. We've been like that for pretty much almost six months now, really buying that dip net, what we've had in March. And we've been really only fudging a little bit around with these sector weights and the regional weights. While we've been a bit on the broadening trade in July, I think it's much more going back into the tech and AI story.

33:33Because that correction that we've seen really in June and July, that's really left a lot of technicals quite oversold, number one. Number two, the earnings season, again, really, really been strong also for the tech and AI names. And they haven't really been rewarded yet. Why? Because of that compression on PEs that's come from higher yields. So it's really leaning back into the NASDAQ. It's leaning back into emerging market Asia, into the tech names there. And on the rate side of things, we're actually still more constructive on US Treasuries, at least in relative terms, relative to European government bond yields.

34:10Because when you look at European government bonds, of course, higher oil prices, that is, in relative terms, at least actually worse even more for Europe than it is for the U.S.

34:21Morgan Brennan: Yeah, and to that point, you're going to see a reaction from central bankers there with the ECB and unexpected rate height this morning and commentary that will be watched closely by the markets. How does what we're seeing in the currency markets factor into all of this? We put a lot of focus on dollar-yen. Speaking of the Treasury Secretary, he said earlier this week that he dares traders to bet against the yen, that, quote, I am the house now. Maybe he can jawbone or not jawbone the Treasury market. But when it comes to FX and specifically what we're seeing in trading dynamics with the yen, how to think about that?

34:54So I think actually for the overall asset class spectrum, this is quite different from what we've seen two years ago. Remember, two years ago, we had this ominous SAHM rule being triggered that was pretty much predicting every recession in the post-World War II environment. And on the back of that, we had these negative economic growth surprises dragging down U.S. yields and that dragging down dollar yen. And with these record high net short positions that were around back then, that was then really, really prompting the unwind of the carry trade. That's quite different now. We don't have negative U.S.

35:27economic surprises. We don't have that. We have actually the opposite. We have nominal growth in the U.S. that's just gone from four and a half percent this time last year to almost seven percent now. So this is really quite different, I think, number one. Number two is we are not seeing really any evidence, any broad-based evidence of carry trades being unwound from a structural, from a systemic perspective. So I really think the effect overall on risk assets, whether it's on credit, whether it's on emerging markets, on the carry trade overall, whether it's on equities, is really limited risk this time around.

35:58Morgan Brennan: OK. Max Kettner, great to have you on and get your insights. Appreciate it. As we head to break, news out of the energy sector. Enbridge striking a deal to buy Tallgrass Energy's crude oil business for about$2.5 billion. That includes a majority stake in a pipeline connecting the Rockies to Cushing, Oklahoma. Tallgrass is owned by Blackstone. Shares of Enbridge down about 2 percent. And Reuters reporting that U.S. pipeline operator Kinetic is exploring a potential sale of the company as well. It transports oil and natural gas from the Permian Basin in Texas and New Mexico. Connecticut is also majority owned by Blackstone.

36:33Morgan Brennan: Those shares are up 4%.

36:38Morgan Brennan: We've got a market flash on shares at Cooper Companies, the medical device maker falling after a third quarter revenue missed forecasts and cut profit guidance for the year. A midweek demand for its contact lenses and that weighed on sales. I think they also scrapped a plan for a deal for part of their business too. So those shares are down 15%. Straight ahead to the morning call crew teeing up the trading day ahead.

37:03Morgan Brennan: Welcome back. There are 54 days left until the midterm election day, Tuesday, November 3rd. One of the key issues across the board, affordability. This morning, we're kicking off coverage of the economy election. CNBC's Megan Costello is live in Concord, North Carolina, just northeast of Charlotte amid a tight Senate race. Megan, good morning. Morgan, good morning. We are calling this the economy election because voters care about the cost of living more than almost anything else. And nowhere is that playing out more clearly than right here in North Carolina. This is a key Senate race for the balance of power.

37:36And Democrats see it as their best chance of flipping a Republican held seat. Now to get there, the Democrat Roy Cooper in his race against former RNC chairman Michael Watley, he's centering his entire campaign around the slogan, make stuff cost less. Take a listen. people in the middle class are barely hanging on and for too many north carolinians there's just too much month at the end of the money right now that message is hitting home for some voters here in cabarrus county this is a red-leaning suburb of charlotte and it's a booming suburb by nearly every sense of the word lots of population growth new housing is going up.

38:19Unemployment is low and billions in new private investment coming in, including from Eli Lilly, which you're seeing there. Now, all of that growth, though, is fueling a rise in prices. So take a look at this. Just two numbers here tell this story. The median household income here in Cabarrus County is$89 ,000. But the MIT living wage calculator suggests that the average family here in this county with two parents, two kids, they need$114 ,000 just to cover their basic expenses. That's the sort of affordability gap that voters are feeling here and that Democrats are keying in on. Now, Watley spoke at the GOP midterm convention in Dallas last night, Morgan, and he says that inflation is the fault of the Biden administration and of Cooper, who was governor here until just last year.

39:02For now, Cooper is leading in the polls by an average of eight percentage points, but everybody expects that to tighten, especially in a state like this one that hasn't sent a Democrat to the Senate in nearly two decades.

39:11Morgan Brennan: Morgan. All right, Megan And Casella, thank you. Looking forward to all of your coverage here over these coming days. Well, from North Carolina to your call sheet, crew members today, Victoria Green from G-Squared Private Wealth. She's also a CNBC contributor, Drew Pettit of Roundhill Investments, and Chris Hodge of Natixis CIB Americas. I mean, we've got to start right there, especially on a day we're going to get the first of two inflation readings. And Vicki, I'll go to you with this first. But this idea of affordability and how it's rippling out, not just in the economy, but across the markets right now, too.

39:44It's a really tough spot to be in right now because you've got oil prices drifting higher, record high diesel prices, and the affordability is a huge issue with inflation. So I think this is the most consequential CPI report we've had this year. I think it might come in a little bit high, 3.4 on the headline, 2.4 on core, 4.04 month over month. But look, they're losing the headlines here. And if it's not a real recession, it's a vibe session for the middle and lower income classes. you just feel continually squeezed by fuel prices, by insurance prices, you know, maybe a little relief on rent, but it's just not hitting the pocketbooks enough.

40:17So this becomes the talking point. When are we out of Iran? When do we get oil prices down? Then that can start bringing CPI down and maybe hopefully we can also fix the treasury markets while we're at it. So, you know, a whole litany of things that are just a really bad feedback loop right now.

40:33Morgan Brennan: Chris, I want to get your thoughts on this, especially because as Megan just, you know, reported from the ground in North Carolina. We did have this GOP midterm convention, the first of its kind last night. Affordability was a big focus there, including the promise, the possibility, depending on midterm election outcomes, of a$5 ,000 per American adult dividend and a number of other things like making Trump tax cuts permanent as well. Well, I mean, of course, the president would have to get buy-in from Congress to do anything like that. But if affordability really is a concern, handing out checks in a form of$5 ,000 probably isn't going to do much to address that.

41:11So I do think this affordability issue really is weighing on consumers. And consumer demand has really been OK. But it's that bottom part of the K, that bottom 40 percent of earners that are really starting to pull back on their discretionary purchases. Now, it's not collapsing, but I do think it's going to weigh on growth in Q3, Q4, and into 2027 as well.

41:38Morgan Brennan: Chris, Drew, want to get your thoughts on this too, especially as we do see ongoing gyrations and concerns playing out arguably in the treasury market. Yeah, it's funny. So rates are our biggest concern. So hot CPI, if it has a feed through to a higher 10, you're not good for risk taking. But there's one thing like in the inflation report, I think a lot of people don't look at, I want to see the difference between CPI, the PPI kind of, I would say like end stage demand versus the early stage demand. So we talk about this a lot. It's inflation differentials that really matter to margins. So if inflation differentials are still wide, if CPI is coming in hotter than the early stage PPI, you feel better about business confidence and margin that they can actually pass this stuff through.

42:28If that's not the case with higher oil and input prices, again, then you have a double whammy where higher inflation, bad for rates, bad for valuations, bad inflation differentials, bad for earnings.

42:40Morgan Brennan: Chris, I do want to go back to CPI and PPI because, OK, yes, crude oil is climbing again. We're back at multi-month highs. But you've got diesel. And this is the case in Europe, right? You got 100 bucks a barrel crude oil. You got 200 bucks a barrel diesel right now. So how important then is something like PPI, where you're going to see those first knock-on effects, which we know have broader implications for inflation overall? Yeah, it's certainly very important to measure those pipeline pressures. But as Drew was saying, what is the ability for these businesses to pass along these pressures, right?

43:15So margins, have been fairly solid right now. And I do think that there's probably not much room for businesses to pass along these pressures. So while PPI is important from an earnings perspective, I think it's less important for consumer prices because I don't think consumers are really in a position to accept these higher costs. And I think demand is ultimately going to be hit by this.

43:40Morgan Brennan: And we talked so much about government debt issuance, but the other piece of this, Vicky, is, you know, corporate debt issuance as well. And one of those names that's been in key focus for this AI infrastructure build out is Oracle. So what are you watching after the bell here? Oh, it's going to be all about CapEx and negative free cash flow. We're expecting 20 billion in CapEx, negative 10 billion free cash flow. Everybody wants to know how much more debt are you issuing? Are you doing the market equity issuance? How are you paying for this? They're expected to grow their data centers by 115 percent.

44:09They are growing. The problem is that debt side and how they're financing this has become a real albatross for Oracle. So in my opinion, that's what we're going to be focused more on. How and when are we financing it? Is it equity or debt? The market's already punishing Oracle on both sides, especially on the debt side with the CDS swaps, you know, continuing to widen because they're saying, look at this debt burden and balance sheet here and starting to have some major concerns on that. So I think, obviously, they're going to make a lot of money. They're going to show tremendous growth on their data center side.

44:37The big question is, what is this trajectory? How are you paying for it? When are you paying for it? Is it equity or debt? And what is it? How is the market going to react?

44:45Morgan Brennan: Yeah, true. I see you nodding your head. And of course, it's Oracle after the bell. It's also Adobe. We're also coming off of what's being seen as a very positive first iPhone event for Apple, too. Yeah, look, it's this quality deterioration in some of these names. That's a bit of a concern. This is why we actually like rotating back into the Magnificent Seven right now. Some of them, yeah, are issuing some debt, are issuing some equity. But I think you get a higher quality play to kind of play through a lot of this noise. And look, Apple, come back to the consumer, they didn't really put as high a price on new iPhones as we expected.

45:20So look, there could be some sensitivity there. So at the end of the day, like if you're seeing quality deterioration, you probably want to stay in the names where you have at least some conviction and growth. Mag7 sets up really well in that scenario.

45:33Morgan Brennan: Okay, we've got 20 seconds left. Chris, final thoughts, especially as we look to an ECB rate decision this morning. We continue to monitor FX volatility as well. Yeah, I think ultimately what's going to matter for the Fed is CPI coming out tomorrow. Never before have clients been asking such granular questions. And I do think that anything that comes below 0.22 on the month is probably safe. Okay, we're going to leave it there. Thank you to our call crew. Great to have you here.

46:36Transcription by CastingWords information.