Stock indexes are lower as bond yields jump to start the week. There appears to be some walking back of Federal Reserve rate cut expectations as new data indicates that inflation forces remain in play.

Most on Wall Street now expect the Federal Reserve will lower rates two to three times (-25 basis points each) versus three to four being penciled last week. The shift partially stems from the ISM Manufacturing Index which moved into expansion territory in March for the first time since September 2022.

While the recovery is good news for those worried that the US economy might be at risk of a deeper slowdown, the downside is that manufacturing prices continue to tick higher. The “prices paid” component jumped to +55.8% from +52.5% in February. Bears see the report supporting their argument that with consumer spending holding up, business activity improving, and prices still climbing, the Federal Reserve has virtually no incentive to cut interest rates.

Bears also point out that the Fed’s inflation fight is being threatened by instability in the Middle East that could be on the verge of escalating into a more widespread conflict. The newest development involves the bombing of an Iran embassy in Syria that reportedly killed a high-ranking Iranian general tied to the Islamic Revolutionary Guard Corps. Israel has struck Iranian targets in the past but they’ve stepped them up since the outbreak of their war against Hamas in Gaza.

Israel and Iran have also been in a “proxy” war for decades. Most of Iran’s aggressions are carried out via terrorist groups that the country supports, including Hamas as well as the Houthis in Yemen that have been targeting ships in the Red Sea. Meaning Israel’s strike is a continuation of the status quo so may not have any impact at all on the current situation. Still, there is the possibility that Iran or its proxies retaliate and/or draw more countries into the conflict.

There is also a risk that more oil infrastructure is damaged or supply chains are further disrupted due to increased fighting in the region, which would obviously put more upward pressure on oil prices. As we’ve seen in the very recent past, prolonged high energy prices eventually work their way into consumer prices. We’ve also seen that manufacturers are slow to walk those prices back, if it happens at all.

Bottom line, another surge in oil and wider energy costs could completely derail plans for Fed rate cuts this year and possibly even put rate hikes back on the table.

It’s worth noting that OPEC+ ministers are scheduled to meet on Wednesday to review the groups current production cuts. They are not expected to recommend any changes.

Bulls this week are hoping new jobs data can provide a tailwind. That includes the Job Openings and Labor Turnover Survey (JOLTS) due today. Most expect a further slowdown in hiring and job creation which could help calm fears that the economy is heating up again. The bigger attraction is of course the “official” March jobs report due out on Friday. The major risk is that the report delivers a stronger-than-expected gain in jobs and/or wages, reinforcing the bears’ argument that the Fed will need to keep interest rates higher for longer than currently forecast.

There are several Fed speakers on the calendar today, including Governor Michelle W. Bowman. It’s also worth noting that Fed Chair Jerome Powell delivers a speech on the “Economic Outlook” tomorrow. Earnings today include CalMaine Foods, Dave & Busters, and Paychex.

Real Rates" Jump Higher as Inflation Worries Remain:  Fears over persistent inflation resurface in U.S. Treasury market. There’s an underlying unease that inflation is not going to fade away as easily as the Fed’s base-case scenario. Monday’s strong manufacturing-related data from the Institute for Supply Management was enough to lead to a recalibration of long-term market-based rates. Traders aggressively sold off Treasurys yesterday, pushing 2-, 10-, and 30-year yields up by the most in more than a month. Ten-year and 30-year yields respectively jumped by +13.7 basis points and +13 basis points to 4.329% and 4.467%. Those were the biggest one-day advances since Feb. 13 and Oct. 12, according to Dow Jones Market Data. Until Monday, yields had largely remained range-bound over the past few months, with traders confident the Fed would ultimately win its inflation battle. The last time yields meaningfully spiked was in October, when a continued stream of data reinforced the economy’s resiliency and pushed rates on 2-, 10- and 30-year Treasurys to their highest levels since 2006-2007. In a note on Monday, strategists at BlackRock Investment Institute, the in-house research arm of investment manager BlackRock Inc., said “We see higher yields persisting even if rate cuts are coming.” As I've been saying for months, the Fed might cut, but I worry that "real rates' might stay higher for much longer than most are anticipating. Source Marketwatch

Gambler in Vegas Hits Three Major Jackpots in 3-Hours! A gambler at Ceasars Palace in Las Vegas hit three major prizes in just three hours Tuesday night into Wednesday morning, according to Caesars Entertainment. The player won $125,000 on a Dragon Link slot machine, then won $383,500 on the same type of machine and finished the streak with a $159,250 win. The winning streak began just before 9:30 p.m. local time and ended just before 12:30 am. The player pulled out $667,750 in total. What a run! 

Gen Z Might Be the Toolbelt Generation: Long beset by a labor crunch, the skilled trades are newly appealing to the youngest cohort of American workers, many of whom are choosing to leave the college path. Rising pay and new technologies in fields from welding to machine tooling are giving trade professions a face-lift, helping them shed the image of being dirty, low-end work. Growing skepticism about the return on a college education, the cost of which has soared in recent decades, is adding to their shine. Enrollment in vocational training programs is surging as overall enrollment in community colleges and four-year institutions has fallen. The number of students enrolled in vocational-focused community colleges rose 16% last year to its highest level since the National Student Clearinghouse began tracking such data in 2018. The ranks of students studying construction trades rose 23% during that time, while those in programs covering HVAC and vehicle maintenance and repair increased 7%. A shortage of skilled tradespeople, brought on as older electricians, plumbers and welders retire, is driving up the cost of labor. The median pay for new construction hires rose 5.1% to $48,089 last year. By contrast, new hires in professional services earned an annual $39,520, up 2.7% from 2022. That’s the fourth year that median annual pay for new construction hires has eclipsed earnings for new hires in both the professional services and information sectors—such as accountants or IT maintenance workers—ADP says.  The rise of generative AI is changing the career calculus for some young people. The majority of respondents Jobber surveyed said they thought blue-collar jobs offered better job security than white-collar ones, given the growth of AI. Source WSJ

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Temporary Shipping Route Will Be Opened Near Collapsed Baltimore Bridge: A temporary channel will be opened to allow some commercial vessels to resume operations in and out of the Baltimore port, while efforts to clean up the collapsed Francis Scott Key Bridge continue, authorities said. A statement issued by Unified Command—a group of federal and state agencies overseeing the response to the bridge collapse—said the captain of the port is setting up “a temporary alternate channel on the northeast side of the main channel…for commercially essential vessels.” Officials said the move was part of a “phased approach to opening the main channel.” U.S. Coast Guard Capt. David O’Connell, the federal response coordinator on-scene, said opening the alternate route will support “the flow of marine traffic into Baltimore,” but it is unclear which specific vessels will be allowed to use it. The statement also does not mention a timeline for when the alternate route will be opened. Source Forbes

California Green City Backers Advance Landowner Legal Fight: A company that bought property for a group of tech billionaires trying to build a sustainable city in northern California won a ruling advancing its lawsuit that accused landowners in the project’s target area of a conspiracy to drive up prices. A federal judge in Sacramento denied a request by landowners to dismiss the suit by Flannery Associates LLC, the company behind the California Forever project, which carried out a multiyear secret land-buying spree in a semi-rural county northeast of San Francisco and ultimately acquired scores of parcels totaling about 62,000 acres. The plan has since faced fierce criticism from local officials and residents who’ve raised concerns about its impact on the environment and local agricultural economy and security around nearby Travis Air Force Base. In the lawsuit, Flannery sought more than $500 million in damages from a group of local landowners, alleging they colluded to overcharge the company as it attempted to buy property. The judge said the suit can move forward over allegations that the landowners shared confidential information with each other about Flannery’s negotiation tactics. Source Bloomberg

UPS Replaces FedEx with Postal Service Air Cargo Contract: UPS will replace FedEx as the dominant provider of domestic air cargo for the U.S. Postal Service for the first time in more than 20 years. The express delivery giant on Monday announced that the Postal Service has awarded it a “significant” contract to move the majority of the mail agency’s air cargo in the United States. The contract will take effect on Sept. 30 and calls for a 5.5-year minimum base term, according to the Postal Service. FedEx’s contract with the U.S. Postal Service expires Sept. 29. The Postal Service is FedEx’s largest customer, but it was clear the relationship would change this year. The Postal Service has been shifting more air parcels to its ground network since 2021 as part of a productivity drive. Lower postal volumes have left FedEx with excess fixed infrastructure for its daytime air network and higher operating costs per unit. FedEx officials have said the contract with the Postal Service was barely breaking even and that they were prepared not to renew the contract if better terms couldn’t be arranged.  Source Freightwaves

Microsoft Allegedly Planning $100 Billion AI Data Center: Chip stocks are rallying in the wake of a report that Microsoft and OpenAI a re planning to build a gigantic data center to run artificial intelligence software that could require an investment of as much as $100 billion. That would be a remarkable move: Microsoft’s capital spending over the last four quarters was $41.2 billion. The company’s total capital spending over the past four fiscal years combined was $104.3 billion. The whole idea of building a data center of that size is hard to comprehend, and neither company has commented on the numbers in the report, published by The Information. That article noted that $100 billion would be about 100 times more than the spending required for current cutting-edge data centers. A spokesperson for Microsoft declined to speak about the details. Source Barrons

Caribbean “Golden Passport” Costs Soar: Caribbean “golden passports” are getting more expensive, a response to pressure from the US and the European Union to crack down on citizenship sales. A group of four Caribbean nations has agreed to charge at least $200,000 for their passports starting June 30, double the current rate in some cases. The countries will also close loopholes that allowed passports to be sold at a discount. Citizenship-by-investment, or CBI, programs rake in more than $579 million a year in the Caribbean and make up more than half the national revenue of some of the region’s tiny island nations. But the programs are under scrutiny by European and US regulators, who are increasingly concerned that they are being used to circumvent immigration controls and can serve as a gateway for criminals. “Golden passports” give visa-free access to the EU, the UK and other countries, making them popular with nationalities that would usually be required to apply for travel permits. The Organization for Economic Co-operation and Development said the programs may help criminals “perpetrate massive frauds and launder proceeds of crime and corruption reaching into the billions of dollars.” But demand for the passports is also soaring. Interest has increased almost 300% during the first two months of the year, which some have pinned on the rise of Bitcoin and other tokens. US citizens, who see a second passport as a hedge against geopolitical turmoil, are propping up sales too.  Source Bloomberg

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