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Stock bulls have taken a few steps back as they reassess the outlook for Federal Reserve interest rate cuts. The March CPI (consumer price index) released yesterday seems to have confirmed that last year’s “disinflation” trend has indeed stalled and that inflation remains a concern.
Headline CPI, driven by energy prices and shelter, jumped to an annual rate of +3.5% versus +3.2% in February while the “core” rate (strips out food and energy) was flat but still up +3.8%.
The Fed prefers core rates and while it’s good news this isn’t accelerating, it also doesn’t provide any sort of evidence that inflation is moving lower, which is what central bank officials have repeatedly said they’re looking for. It’s worth noting that the “minutes” from the Fed’s March FOMC meeting showed that officials “generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence.”
That view was based on January and February data, and we’ve now added a third month of still “hot” inflationary reads. With energy and shelter prices continuing to make strong gains, more traders are starting to worry that inflation could rebound and become even stronger, which could lead to rate hikes rather than rate cuts in the months ahead.
In fact, traders have pushed the odds of a June rate cut down to around only 16% with most now thinking the first cut won’t happen until September. Expectations for the number of cuts has also been dropped to just one or perhaps two -25 basis point cuts vs. talk of three or four cuts just a few weeks back and as many as six to seven cuts being talked about at the start of the year.
Bears point out that the stock rally that began in late October has been fueled by the consensus that the Fed would begin rate cuts in the first half of the year, inflation would continue to decline, and bond yields would moderate. With all of those things now in doubt, bears believe it’s extremely tough to justify pushing stocks higher and expect markets could easily slide further as traders come to grips with a less optimistic Fed outlook.
The March PPI (producer price index) due out today could be pivotal in cementing investors’ views of where inflation is headed. Both headline and core PPI were much stronger than expected in February and another hot read is only going to exacerbate the renewed inflation worries.
Wall Street expects both headline and core PPI to come in at +2.3%, versus +1.6% and +2.0% in February. There’s really not much economic data on the calendar in the weeks ahead that could ease inflation concerns either. The next big test will be the PCE Prices Index on April 26, though that will reflect March prices which we already know were running hot.
The April CPI report isn’t out until May 15. That means bulls are hoping for an earnings growth story to restore the upward momentum in the weeks ahead. Bulls are also quick to remind that the market rally this year has been partially fueled by excitement about artificial intelligence, which has maybe cooled a bit but is still alive and healthy. In fact, bulls are extremely optimistic about upcoming big tech earnings later this month with Wall Street expecting the sector to post +20% growth or more. Big Wall Street banks Citigroup, JPMorgan, and Wells Fargo kick off Q1 2024 earning season on Friday.
Earnings today include CarMax, Constellation Brands, and Fastenal. Staying conservative...
US Believes Iran Could Attack Israel Any Day Now: The United States believes Iran may retaliate against Israel in coming days, according to two sources familiar with intelligence on the matter. The intelligence that Iran could use drones and missiles to attack "regional assets" by Israel has been shared with U.S. lawmakers. U.S. officials believe the attacks would be done in retaliation for Israel's airstrike in Damascus, Syria, last week, which killed several military personnel. If Iran's retaliatory happens, officials believe the attacks have the potential to widen the scope of the war in Gaza. Israel has warned that, should Iran attack from its territory, they will respond with an attack in Iran. According to one U.S. official, it's believed that Iran could choose to retaliate in a proportional response targeting an Israeli diplomatic facility like the Iranian diplomatic location that was struck on Monday in Syria. Or, the official said, it's possible that Iran could strike directly at Israel. Source ABC News
US Postal Service Continues to Struggle... Proposes Yet Another Hike in Stamps: I hate to tell them, it ain't the price of the stamps, they need to take a better look at their own service. The Unites States Postal Service filed notice with the Postal Regulatory Commission this week to raise prices by approximately +7.8% effective July 14, 2024. If approved, the price of a First-Class Mail Forever stamp would increase from 68 cents to 73 cents. What they are proposing is the 19th stamp rate hike since 2000 and what's the fifth proposed rate hike in two years. Rates on stamps last went up in January 2024. Before that, they rose in July 2023, January 2023 and July 2022. Between the 1970s and 2000, rates only increased about three to four times a decade Source Axios
Pretty Cool Story... The Merchant Banker Who Could Win the Masters: In the 89-man field at golf’s most prestigious tournament, Stewart Hagestad is a player unlike any other. He has a business degree and works a full-time job as an associate at BDT & MSD Partners, an investment and advisory firm that has more than $60 billion of assets under management. But once he shuts down his computer at the end of the day, he finds time to play golf. The 33-year-old amateur will compete at Augusta National this week, then head back to his day job on Wall Street. Hagestad defies every shred of conventional thinking about athletic achievement because he’s playing perhaps the best he ever has even as he spends just a fraction of the time his competitors do on sharpening his game. Unlike almost every other amateur who finds his way into the Masters, Hagestad has no ambition to play the game professionally. Hagestad, who recently moved to his firm’s Florida office, got to the Master's by winning last year’s U.S. Mid-Amateur, a competition for players 25 or older where he has established himself as the dominant performer of his generation. That was the third time he has won the event, a feat that has helped him rack up six major appearances before this week’s Masters. The first time he competed here in 2017, he finished tied for 36th as the low amateur. Source WSJ
Car and Truck Payments Getting Absurd But Become More Common: As of this February, more than +17% of new cars were financed with a monthly payment of over +$1,000, compared with just 5% in February 2020, according to data from the car site Edmunds. Over the same period, the average transaction price for new vehicles jumped from $38,130 to $47,060, and the average interest rate on new-car loans went from 5.7% to 7.1%. About 70% of monthly payments on large SUVs like the Tahoe are at least $1,000, and for large trucks such as a Sierra, that share is over 40%, said Joseph Yoon, a consumer-insights analyst at Edmunds. These vehicles are not uncommon, either, large trucks are the third-best-selling category in the U.S., after compact and midsize SUVs. The old rule of thumb for car payments was always to spend less than 10% of your monthly take-home pay on car payments, and no more than 15% to 20% on transportation costs, which, for those who own cars, include a car payment, insurance and fuel. Source MarketWatch
Credit-Card Delinquency Rates Hit Record Level in Q4: US credit-card delinquency rates were the highest on record in the fourth quarter, according to a Federal Reserve Bank of Philadelphia report. Almost 3.5% of card balances were at least 30 days past due as of the end of December, the Philadelphia Fed said. That’s the highest figure in the data series going back to 2012, and up by about +30 basis points from the previous quarter. The share of debts that are 60 and 90 days late also climbed. “Stress among cardholders was further underscored in payment behavior, as the share of accounts making minimum payments rose 34 basis points to a series high,” according to the report. Nominal credit card balances set a new series high and card utilization also rose, as consumers stretched credit lines further. However, inflation-adjusted credit card balances remained below fourth-quarter 2019 levels. The numbers signal added pressure on US household finances amid higher costs of living. About 10% of credit-card borrowers now have an account balance that exceeds $5,200, according to the Philadelphia Fed. One-quarter of active accounts have a balance of over $2,000 for the first time. But, underscoring the dichotomy among consumers, about one-third of card holders pay their balance in full every month. Source Bloomberg
Banks Strike Back Against Private Credit: When it comes to financing deals, don’t count out the big Wall Street banks quite yet. A big narrative in recent years has been that America’s biggest deposit-taking investment banks are losing ground to their nonbank rivals, the likes of Blackstone and Apollo Group. One worry for banks was that private credit—meaning, in this context, lending directly to businesses by alternative-asset fund managers, insurers and others—was going to eat into investment banks’ business originating loans and distributing them to investors. But so far this year, a lot of financing deals are actually coming back to banks from private credit. In the first quarter, almost $12 billion of debt previously from direct lenders was refinanced via the so-called broadly syndicated loan market, according to PitchBook LCD, a channel dominated by banks. This was a sharp reversal of the opposite pattern in the prior two quarters. Moody’s Investors Service in a recent report wrote that “banks are fully aware of the substantial capital that direct lenders have, and are fighting back.” Some borrowers were saving up to 2 to 3 percentage points via broadly syndicated loans, according to the report. “Not only have banks returned to underwriting deals, they have substantially lowered pricing,” Moody’s said. Source WSJ
Starbucks Thinks Quieter Stores Will Help Get Orders Right: Starbucks Corp. doesn’t want you to have to shout to order your iced latte. The coffee chain’s new and renovated stores include materials like baffles on the ceiling that help to reduce background noise and reverberations. That could make it easier for guests — especially those with hearing loss — to communicate while also dampening the din that can make it difficult for baristas to discern what customers are saying. A study of the restaurant industry from research firm Intouch Insight shows that drive-thru orders are accurate only 86% of the time and errors can cost tens of thousand of dollars Source Bloomberg
US and Its Allies Face $10 Trillion Reckoning in Race to Rearm: A new era of global rearmament is gathering pace, and it will mean vast costs and some tough decisions for western governments already struggling with shaky public finances. Political leaders have been congratulating themselves on the progress toward NATO’s targets for members of the alliance to set aside 2% of their gross domestic product on defense. But officials focused on security say that military budgets may need to emulate Cold War spending of as high as 4% in order to deliver on the alliance’s plans. If the US and its Group of Seven allies were to reach such levels, that would equate to more than $10 trillion of additional commitments over the next decade, according to calculations by Bloomberg Economics. The brutal reality for the US and its allies is that Vladimir Putin’s advances in Ukraine mean they need to dramatically ramp up their defenses in eastern Europe at the same time as they counterbalance China — just as that country increases cooperation with Moscow. Even just meeting the alliance’s 2% of annual GDP minimum for military outlays would stall much of the EU’s post-pandemic debt consolidation. Getting to 4% would push the bloc’s weaker sovereigns to make painful choices. Even the US, which is already allocating 3.3% of its annual GDP on defense, would see borrowings increase to 131% from 99% over the next decade if it pushed its military budget to 4%. Source Bloomberg
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