Fed Friction, $100 Oil, and PepsiCo's Margins

Grant Calloway

Welcome to the Bull Sheet. I'm Grant Calloway, it's Thursday, October 8th, and yesterday left us three loose threads. The Fed minutes, Levi's after hours print, and whether PepsiCo could outrun the bond market. We'll pull all three before the day gets away from us.

Grant Calloway

Start with the minutes. The September 15th and 16th meeting, where the Fed raised rates a quarter point to a range of 3.75% to 4%, turns out to have been a hike with two different explanations. Per the minutes, some participants saw it as necessary to keep the energy price shock from leaking into everything else. Others saw it as a way to cool demand driven inflation. Same vote, different reasons. That is a committee that agrees on the action and argues about the diagnosis.

Grant Calloway

The market read it as a reason to relax a little. CME FedWatch has the odds of another hike at the October 27th and 28th meeting at 17.2%, down from 37.6% a week ago. The money is leaning toward an October pause, with December still live. And this morning's jobless claims didn't change that. Initial claims came in at 197,000 for the week ended October 3rd, a touch better than the 200,000 economists expected. Claims have sat near 57 year lows four weeks running. But continuing claims rose 17,000 to 1.716 million, and the median time out of work is 11.5 weeks, near a four and a half year high. Per Reuters, economists call it a low hire, low fire market. Nobody's getting fired, and nobody's getting hired. That's a quiet room, and quiet rooms get expensive when rates are rising.

Grant Calloway

Now the tape. Stocks opened lower this morning, extending yesterday's pullback. At the open the Dow was down about 178 points, or 0.35%, near 51,001. The S&P 500 was off 0.37%, around 7,773, and the Nasdaq was down 0.49%. Yesterday, the Dow lost 0.66% and the Russell 2000 slid 1.3%. The S&P and Dow snapped four day winning streaks.

Grant Calloway

The culprits are the usual two, oil and yields. Crude jumped nearly 4% this morning on the Middle East disruptions. Brent is trading a bit above $100 a barrel, roughly $101 to $102, and WTI is around $90. That's even with the International Energy Agency moving to speed up emergency stock releases, with diesel first in line. The 30 year Treasury is sitting near a 24 year high around 5.70%. The 10 year is holding roughly between 5.31% and 5.35%. The dollar index is elevated, around 102, and European markets are wobbly. The FTSE dipped as oil surged, and Bank of England officials Pill and Greene are both warning about sticky inflation. One bright spot in Europe, Germany's government raised its 2026 growth forecast to 1.3% from 0.5% in April.

Grant Calloway

Movers. PepsiCo is the headliner, so I'll hold it for a moment. Levi Strauss reported after the bell. Revenue rose 4% to $1.61 billion, adjusted earnings were 48 cents against 34 cents a year ago, and it raised full year profit guidance to $1.54 to $1.56. But look inside. Tariff refunds contributed 16 cents a share to that quarter, and the company redeployed about 5 cents of it into promotions. U.S. revenue slipped 1%, direct to consumer comparable sales were flat, and the company trimmed its reported revenue growth outlook to the bottom of its range. Shares are hovering flat to slightly lower. The margin beat is real, but it wears a tariff refund on its sleeve.

Grant Calloway

In tech, GlobalFoundries announced a $2 billion deal to make a key AI chip component for TSMC. SpaceX is under pressure after reports it's seeking $40 billion in financing to buy Nvidia chips. In consumer land, Amazon is making fresh job cuts mainly in retail, while launching higher priced Android tablets with Alexa. And in materials, AkzoNobel and Axalta look set to win conditional EU antitrust approval for their $25 billion merger, if Axalta sells its vehicle refinish business, per people familiar with the matter.

Grant Calloway

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Grant Calloway

Now PepsiCo, and the question I've been chewing on all week. Can cost cutting outrun a 5.7% long bond and $100 oil? Pepsi reported before the bell. Revenue was $25.27 billion against $24.96 billion expected, and core earnings per share were $2.34 against $2.29, per LSEG. A beat on both lines. Then the guidance. Currency adjusted core EPS growth for the year now goes to 1% to 2%, from the low end of the prior 4% to 6% range. Organic revenue growth is about 3%. CEO Ramon Laguarta said additional structural cost reduction actions will be implemented in the coming months. Shares are up about 1% premarket. So that's the debate. Let's have it.

Grant Calloway

The bull reads it this way. The operators are doing their jobs. Pepsi beat on both lines and is cutting overhead before anyone forces it to. Levi's gross margin hit 66.2% and management raised profit guidance. Claims under 200,000 say the paycheck foundation is intact. And S&P 500 third quarter earnings are expected to grow 30.6% year over year, per LSEG. When the volume isn't there, you cut the cost, and the profit shows up. The bull says that's what a good operator does.

Grant Calloway

Here's the bear, and the bear is not short on evidence. Pepsi cut prices by up to 15% on Lay's and Doritos back in February, and North American food volume still came in flat. Beverage volume fell 2%. Levi's U.S. revenue slipped 1% and its own direct to consumer business, in the CEO's words, fell short of internal expectations. Both companies trimmed the top line while polishing the bottom. Add a 30 year yield at 5.7%, mortgage rates near three year highs, and people out of work for 11.5 weeks. The bear says you can cut cost only so many times. After that, margin has to come from a customer who isn't showing up.

Grant Calloway

Where do I land? I've traded through two crashes, and I've learned that cost cuts buy time, not demand. The bull is right that the earnings are holding. The bear is right about why they're holding. Pepsi's own CFO said fixing North America is taking more time than planned. And Levi's profit raise leans on a tariff refund that won't repeat. So I'd say the bulls get this quarter and the bears get the argument about next year. Cost discipline is a bridge. The question is what's on the far bank. And I'll admit it, I don't know yet.

Grant Calloway

On deck. The data is already out, claims this morning. For the rest of today, Bank of England Governor Bailey speaks, and the market will keep chewing on the WTO's upgrade to its global goods trade forecast, which credits AI related demand for offsetting the war's disruptions. Keep one eye on bond auctions and supply, because with yields where they are, the market's appetite for debt is the story under every other story.

Grant Calloway

Tomorrow, Friday, October 9th, Delta Air Lines reports before the open. That's a real test of how much travelers will pay when jet fuel is surging, and it comes alongside preliminary Michigan consumer sentiment. Next week, the big banks start third quarter earnings, and per Reuters, investors will watch whether higher yields are choking dealmaking and lending.

Grant Calloway

So what matters most today? Oil and the long bond. If Brent keeps pushing and the 30 year stays near 5.7%, everything else is just commentary. Tune in tomorrow at seven for Delta and the sentiment numbers. And as always, this podcast is for educational purposes only and is not investment advice. I'm Grant Calloway. The tape's tighter than a drum this morning, so mind your footing.