The finish line is finally in sight for the Fed’s marathon race toward rate cuts and a soft landing. Maybe some last-mile anxiety was inevitable.

Tuesday brought a double dose of mildly foreboding data, with both manufacturing and construction spending coming in softer than expected in August and July, respectively. The downbeats were enough to stoke fears of a broader downturn and to trigger, in part, the worst day on the markets since the near-meltdown seen almost exactly a month ago. The closer we get to that widely-expected rate cut, the more and more necessary it seems.

Can You Build it?

Construction spending fell 0.3% in July compared to June, when spending stayed constant, according to data released Tuesday from the US Commerce Department’s Census Bureau. That was lower than expectations (though it still marked a nearly 7% jump year-over-year), and is largely thanks to high mortgage rates and overall high costs of homeownership constricting demand. Concurrently, data released Tuesday from the Institute for Supply Management showed that manufacturing in the US contracted in August for the fifth straight month as manufacturers continue to face higher and higher input prices.

One piece of bad news may have been priced in. But two? That makes the approaching soft-landing zone look smaller and smaller. “There wasn’t anything encouraging in the data,” Ian Lyngen, head of US rates strategy at BMO Capital Markets, told the Financial Times. On the markets, that pessimism reared its ugly head:

• The S&P 500 closed down 2.1% Tuesday, while the tech-heavy Nasdaq Composite index plummeted around 3.3%. Nvidia, which took a pounding last week after a mildly disappointing earnings call, fell nearly 10%. 
• The VIX, or Wall Street’s fear index, soared 33%, though it remains around half as high as it was a month ago. Meanwhile, Brent crude futures fell nearly 5% to below $74 per barrel, erasing all the gains seen in 2024 in the process.

Rate Your Turn: Ironically, the slowdowns in both manufacturing and construction could likely be explained at least in part by contractors waiting for the rate cut before pushing ahead with expensive plans. Meanwhile, one more jobs report is expected this Friday, ahead of the Sept. 17 Fed meeting. That could influence whether Jerome Powell and co. cut interest rates by a quarter or a half-point, as well as how quickly they continue to cut in the rest of the year’s meetings. Ahead of the jobs data dump, we suggest the 4-7-8 breathing technique. 

AI might make life easier (this point is debatable, but now isn’t the time), but it’s also making everything more expensive.

This week, users of Canva — a buzzy design software startup seen as the cheap alternative to Adobe — were dismayed to open their inboxes and find that their subscriptions were going up. Not just going up, but rocketing by as much as 300%, per reporting from The Verge. In a statement to The Verge, Canva’s communications lead said the price increase reflects an enhanced suite of products that the company has woven into its subscriptions. The majority of those new products? AI tools.

Spared No Expense

When a company announces a price hike, its explanation for doing so often isn’t the full story, of course. Canva is reportedly readying itself for an IPO, so there could be an element of fattening up the company’s financials.

However, generative AI tools are also expensive to develop and maintain, and while all kinds of companies have pitched into feathering AI throughout their business operations, not that many seem to have cracked the profitability nut yet. And Canva has released a lot of tools:

• In October 2023, Canva released a suite of AI tools called Magic Studio. The tools let users automatically convert their content into different formats, translate it into other languages, and generate both images and video.
• According to emails sent to Canva users in the US, subscriptions are going up from $120 a year to $500, although it is offering a discounted first year for $300. A discount that’s still a 150% increase — that’s a real design trick.

Open the Coffers: Even the most popular AI tools aren’t necessarily mastering the money-making side of things. On Tuesday, The New York Times published a temperature check on everyone’s favorite AI startup-slash-giant OpenAI; one source inside the company told the NYT that it’s now generating around $2 billion in annual revenue. OpenAI is a private company, so its financials are not so open, but an analysis by The Information in July found its expenditures could reach around $7 billion for the year, resulting in a $5 billion loss.

Data from two promising vaccine trials, announced Tuesday, heralded potential breakthroughs in the treatment of pneumococcal infection and Lyme disease.

One could add to pharma giant Pfizer’s market share, while the other could subtract from it. 

Daily Stock Ticks

Pfizer and its French partner Valneva said Tuesday that a mid-stage trial of their Lyme disease vaccine candidate — which targets the outer surface protein of the bacterium that causes the disease via tick bites — resulted in significant antibody responses and no major safety risks. There’s currently no approved vaccine for Lyme, for which more than 450,000 Americans are treated every year (all aren’t necessarily infected — there were 62,000 confirmed new cases in 2022, according to the Centers for Disease Control).

Meanwhile, Vaxcyte announced that its pneumococcal infection vaccine candidate protected against 31 strains of streptococcus pneumoniae bacteria, which can cause illnesses including meningitis and pneumonia. If the candidate progresses, it’ll propel the upstart, founded in 2013, into a duel of jabs on the open market, with Pfizer likely to get poked: 

• Vaxcyte said its candidate, VAX-31, provided the same or better protection against the 20 pneumococcal infection strains blocked by Pfizer’s Prevnar 20 — a high dose outperformed Pfizer’s jab against 18 of the 20 strains, while a medium dose outperformed 13.
• “VAX-31, if successful, will take up the lion’s share in a growing $10 billion-plus future pneumococcal conjugate vaccine market,” wrote Jefferies analyst Roger Song.

Losing ground in the pneumococcal market could be tough for Pfizer, especially given the relatively small footprint of Lyme. A 2015 study estimated that Lyme disease costs the US healthcare system as much as $1.3 billion annually, while a 2018 study found treatment for chronic conditions associated with the disease costs between $4.8 and $9.6 billion annually.

Stock Booster: Vaxcyte’s shares skyrocketed 36% Tuesday, adding roughly $4 billion to the company’s market cap. Pfizer was down 2.4% and Merck, another major pharma conglomerate with its own pneumococcal vaccine, fell nearly 1.6%.