Stock bulls are still struggling to gain ground despite some notable earnings beats. Facebook-parent Meta is the latest big tech company to surprise with better-than-expected results with both Q1 sales and the forecast for Q2 topping forecasts. Amazon reports today and hopes are high that the company's layoffs and other cost-cutting efforts will translate to an earnings beat and better outlook going forward. Even with promising tech results, stocks may still have a tough time climbing much higher as investors eye several potentially big headwinds ahead.

The most immediate cloud hanging over Wall Street is the Federal Reserve's policy meeting next Tuesday and Wednesday (May 2-3). Investors still widely expect the central bank to lift rates by 25-basis points. More importantly, a majority also anticipate the Fed will pause its rate hiking campaign at the June 13-14 meeting and will be looking for confirmation of that next week.

Remember, a key driver behind this year's stock rebound has been the expectation that the Fed was nearing the end of its tightening cycle. Meaning if the Fed doesn't signal an end to interest rate hikes next week, those gains could be at risk. Bears also point out that much of this year's rally has been limited and led mostly by big tech, which is far outperforming the broader market. That's evident in the Nasdaq's outsized gains this year with the index up more than +13% versus a gain of +5.6% for the S&P 500 and just +0.5% for the Dow.

Bears further warn that while tech's cost-cutting efforts may boost profits in the short-term, the sector's continued layoff announcements signal a weakening outlook that may not bode well for earnings in the quarters ahead. A recession later this year would likely dent tech's outlook even further, along with most other sectors.

Worries about an economic downturn have somewhat improved on Wall Street, particularly with housing prices holding up. Still, the worry remains that even a "mild" recession like many now predict would work to keep a lid on growth, thus making higher stock prices tougher to justify.

Another big worry on Wall Street is the US debt ceiling which many think will be reached sometime in June. The House yesterday passed a Republican bill that would raise the limit but it includes deep cuts to some of President Biden's key programs and is considered "dead on arrival" in the Senate. House Speaker Kevin McCarthy said the bill was meant to spark a dialogue with the Biden administration. However, Biden and Congressional Democrats are insisting on a debt ceiling increase with no spending cuts attached.

Today, investors will be digesting earnings Boeing, CME Group, eBay, Edwards Lifesciences, O'Reilly Automotive, and Thermo Fisher Scientific. Amazon reports after markets close.

On the economic data front, the first estimate of Q1 2023 GDP is due out, along with Pending Home Sales and the Kansas City Fed Manufacturing Index.

Drunkenmiller Betting on US Dollar Decline: Billionaire investor Stanley Druckenmiller is betting against the US dollar as his only high-conviction trade in what he believes is the most uncertain environment for markets and the global economy in his 45-year career. Druckenmiller, who as George Soros’s right-hand man helped break the Bank of England in an assault on the pound in 1992, said he felt confident taking a negative position against the greenback because of his dim view of US policymaking. The US dollar, which rallied strongly last year, has already declined by 10 per cent against a basket of other leading currencies since a November peak, but Druckenmiller believes it has much further to fall. It makes a lot of sense to me consider several nations are trying their best to work around using the US dollar. Source Financial Times

Yuan Overtakes Dollar in China's Cross-Border Transactions: The yuan became the most widely-used currency for cross-border transactions in China in March, overtaking the dollar for the first time, official data showed, reflecting efforts by Beijing to internationalize the use of the yuan. Cross-border payments and receipts in yuan rose to a record $549.9 billion in March from $434.5 billion a month earlier, according to Reuters calculation based on data from the State Administration of Foreign Exchange. The yuan was used in 48.4% of all cross-border transactions, Reuters calculated, while the dollar's share declined to 46.7% from 48.6% a month earlier. Source Reuters

Vanguard Sees Home Prices Dropping Another -5% then Rebounding Higher: The world’s second-largest asset manager, Vanguard, expects headwinds for the U.S. housing sector in the second half of this year. Despite demand being far lower than where it was last year, home prices have recovered in the last few months and a recent Case-Shiller report noted that home prices in February rose 2% compared to last year. But the increase is the smallest since 2012, with a lack of inventory driving home prices up. There are longer-term tailwinds for the housing sector for a couple of reasons, Vanguard said, including an undersupply of homes coupled with a strong demand and/or desire for homes by potential buyers. The decline in housing spending in the second half of 2023 will be part of the reason why the U.S. economy will “most likely” enter a “mild” recession, Vanguard added. Since World War II, whenever the annualized rate of investment in the housing sector, including construction and home improvements, has dropped more than 10%, that’s coincided with a recession with two exceptions — during wartime and when defense spending supported the economy. Source Market Watch

Millennials Fueling "Generational Housing Bubble": Millennials are fueling a generational housing bubble that's set to burst over the next decade as demand for homes falls off, according to researchers. In a recent report from the Indiana University Center for Real Estate Studies and the Indiana Business Research Center, researchers said Millennials — who are between their mid-20s and early-40s, are in the prime-homebuying age — have pushed up home prices in recent years as demand outweighs supply. But the situation will start to reverse over the next decade, as Baby Boomers begin to age out of the housing market. Meanwhile, post-Millennial generations will be smaller as population growth slows. That could lead to an excess of housing, potentially pushing down prices and sparking a crash in the real estate sector. "Plainly put – a generational housing bubble is on the horizon. New housing built now to meet strong demand may sit vacant in a decade. Demand reversal will intensify by the mid-2030s, when the annual number of homes that seniors add back to the market is expected to be 40% higher than current levels," researchers said. Source Insider

Consumer Spending Dropped Sharply in March: Despite slowing inflation, consumer spending contracted in March after slower growth in February. Morning Consult’s proprietary measure of inflation-adjusted total consumer spending decreased by -9.5% in March, mirroring the large declines in retail spending. Morning Consult’s spending data is often directionally indicative of what to expect from the Bureau of Economic Analysis’ personal consumption expenditures report later in the month. Although all income groups reported lower outlays in March, the highest earners had the largest decline, with a 13% reduction in total spending month over month. A similar trend is playing out in consumers’ financial well-being scores: High earners experienced the largest drop in financial well-being in the last year. Morning Consult’s measure of price sensitivity, or “sticker shock,” has increased for all income groups over the past year, indicating that consumers are more likely to walk away from a purchase because the price was too high. As previously forecasted, while low-income earners have reported higher levels of price sensitivity in general, the gaps have narrowed between each income group amid the backdrop of persistent inflation. Higher earners have seen the sharpest increase in price sensitivity, with a particularly large increase in March. Source Morning Consult

Twitter Rival "Bluesky" is Growing Fast: Since buying Twitter last year, Elon Musk has made a series of chaotic changes to the social media service that have alienated legions of users. That’s been good news for Bluesky, an invite-only rival that has quickly gained a following since debuting in February. So far, its app has been downloaded 360,000 times from Apple’s app store worldwide, consumer data group told Fortune, and over a million more users are on the waitlist to join. Most of the new users have been added this month. Bluesky was created by Jack Dorsey, who happens to also be Twitter’s co-founder. In contrast to Twitter, he wanted to build a decentralized service, meaning its user data is stored in independent servers rather than in ones owned by one company—thereby giving users more autonomy in how they interact on the platform. The service is still considered to be in a test phase and has a waitlist for users looking to join it. The timing of any broader rollout is unclear. Source Fortune

U.K. Deals Huge Blow to Microsoft’s $69 Billion Activision Bid: Britain’s mergers regulator on Wednesday blocked Microsoft’s $69 billion takeover bid for Activision Blizzard, ruling that buying the maker of “Call of Duty” would give the tech giant too much control of the thriving market for cloud-based video games. The decision — which surprised many investors after the Competition Markets Authority narrowed the focus of its inquiry earlier this month — poses a serious hurdle for the deal, which already faces opposition from the F.T.C. and is under scrutiny by the E.U. The deal risks “undermining the innovation” happening in cloud gaming, the C.M.A. said, by giving control of popular game titles to Microsoft, which owns the Xbox platform. (Cloud gaming isn’t reliant on users owning expensive consoles.) The regulator wasn’t swayed by promises from Microsoft — which already accounts for up to 70 percent of cloud gaming — to give access to its top games to rivals like Sony and Nintendo. Microsoft pledged to plow ahead, with its president, Brad Smith, saying that the company would appeal. But the path to completing the deal just became harder. Source Dealbook

The $30 Billion Reason for Wall Street Banks to Save First Republic: First Republic is racing to land a rescue deal. The bank is getting hammered in the stock market again, with shares trading down as much as 41% on Wednesday, following reports that it is preparing to sell shares as part of a rescue plan. The San Francisco-based lender is saddled with billions in unrealized losses on its loans and investments, including a large book of single-family mortgages that were issued when interest rates were much lower. First Republic has seen huge deposit outflows (around $100 billion in the first quarter), but selling its loans would trigger outsized losses, potentially wiping out its equity cushion. First Republic is now trying to find a way to shift those assets to other banks without taking on a huge loss. The pitch, according to Hugh Son at CNBC, is essentially this: If First Republic is seized by the FDIC, those same banks will face a bill of $30 billion. That's because the FDIC extracts a levy from healthy banks to help foot the bill for those that collapse. So it's better for those banks to come up with a rescue deal now, and potentially take a small loss, than let First Republic fail and end up paying out even more to the FDIC. These firms are already on the hook to the FDIC for the collapse of SVB and Signature Bank. Source Insider

Urban Downtowns May Never Be the Same: Remote work has taken its toll on urban offices and central business districts. As of late March 2023, office occupancy remained less than half (49%) of what it was before the pandemic in the ten US cities tracked by Kastle’s Back to the Office Barometer. The phenomenon of empty offices appears to be particularly acute in the US and Canada, where long commutes from the suburbs are more common than in other big cities in Europe and Asia. Across the US, office-to-housing conversions are now being pursued as a potential lifeline for struggling downtown business districts. The conversion push is marked by an emphasis on affordability. Multiple cities are offering serious tax breaks for developers to incentivize office-to-housing conversions — provided that a certain percentage of apartments are offered at affordable below-market prices. But the conversion push has some skeptics. Housing advocates worry that the affordable housing requirements could get watered down. And even advocates of the conversion model say giving tax breaks to wealthy developers isn’t the best tool to achieve the goal. And, as increasing numbers of employers turn to hybrid work models, there’s the question of whether people will want to move to downtown areas if they’re not required to be there every day. Source Fortune

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