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Stock indexes are coming off a winning week fueled in part by impressive earnings and strong forward guidance from big tech companies.
Earnings will again be in focus this week but will also be competing with the Federal Reserve, which will release its latest policy decision on rates Wednesday afternoon.
Wall Street expects the Fed to keep rates "unchanged". More important to investors will likely be Fed Chair Jerome Powell’s follow-up press conference on Wednesday, where Wall Street will be looking for clues as to where central banker officials see policy heading from here.
Stubborn inflation has prompted traders to walk back their expectations for Federal Reserve rate cuts this year, with most now only expecting one 25-basis point rate cut in 2024 versus bulls thinking as many as six or seven at the start of the year.
Insiders have also backed things up in regard to when the first rate cut might happen. The trade is now giving it about 50/50 odds that the first rate cut will happen at the September FOMC meeting and about 70% odds that the first rate cut will happen just after the 2024 presidential election in November.
In other words, the trade has not only aggressively walked back the number of rate cuts but also when they think the first rate cut will happen. The PCE Price Index on Friday confirmed that inflation is staying stubbornly hot and prices continue to rise at a faster pace than Wall Street had been anticipating in March.
On a year-over-year basis, the PCE Price Index was up +2.7% versus +2.5% in February, and the core-PCE Price Index was up +2.8%, unchanged from February.
The strength of consumer spending is what seems to keep fueling the inflationary fire - for the second straight month, consumer spending measured by the PCE rose +0.8% in March, the strongest in more than a year. At the same time, there are percolating worries that the economy is headed toward “stagflation”, aka low-to-no growth and higher inflation, following data last week that showed slower-than-expected GDP growth and higher-than-expected inflation in the first quarter.
Bulls argue that so long as consumer spending is holding up, along with corporate profits, it may not matter that the Fed needs to keep interest rates higher for longer. Bears, however, argue that high borrowing costs are creating underlying weaknesses in the economy that will only continue to deepen the longer the Fed remains on hold.
Many bears point to rising consumer credit that they argue is not sustainable in a long-term, high-rate environment. Bears also point toward weaker US consumer gasoline demand, which some call the "canary in the coal mine", and typically the first sign that the consumer is starting to feel the pain and tightening the purse strings.
Remember, consumer spending accounts for nearly two-thirds of the US economy. It’s also worth noting that for about the past year, wage gains have been outpacing the rate of inflation.
The April jobs report on Friday will reveal more details about wage trends. Wall Street is expecting to see a slowdown in both job and wage gains, though similar predictions for the previous three months were consistently proven wrong. There is no economic data of note today.
On the earnings front, bulls are hoping results from Amazon on Tuesday and Apple on Thursday will further boost excitement around AI technology that added to double-digit growth at Microsoft and Google-parent Alphabet results released last week.
Bulls are also hoping to hear good news from a slew of consumer goods and restaurant companies that report this week, including bellwethers like Clorox, Coca-Cola, McDonald’s, and Starbucks tomorrow (Tuesday); Kraft Heinz and Yum Brands on Wednesday; Monster Beverage on Thursday; and Hershey on Friday. Earnings highlights today include Domino’s Pizza, NXP Semiconductor, and Welltower.
A lot of the better-than-expected earnings have been attributed more to "cost-cutting vs. "revenue growth" and or "increasing net-margin". At some point, I have to believe there's not much more "cost-cutting" that can be done, and the market will eventually demand to see front-line growth.
U.S. Fertility Rate Falls to Record Low: The total fertility rate fell to 1.62 births per woman in 2023, a 2% decline from a year earlier, federal data released Thursday showed. It is the lowest rate recorded since the government began tracking it in the 1930s. The decline reflects a continuing trend as American women navigate economic and social challenges that have prompted some to forgo or delay having children. A confluence of factors are at play. American women are having fewer children, later in life. Women are establishing fulfilling careers and have more access to contraception. At the same time, young people are also more uncertain about their futures and spending more of their income on homeownership, student debt and child care. Some women who wait to have children might have fewer than they would have otherwise for reasons including declining fertility. The number of births last year was the lowest since 1979, according to provisional data. About 3.59 million children were born in the U.S. in 2023, a 2% drop compared with 3.66 million in 2022. Source WSJ
How the Strong U.S. Dollar is Rippling Through the World Economy: A surge in the value of the U.S. dollar against most other major currencies is making life complicated for economic policymakers around the world. The flip side of the stronger dollar is weakening in other major currencies, which tends to fuel inflation in countries that have already been struggling to bring price pressures down. It also makes dollar-denominated debts overseas, especially common in emerging markets more onerous, essentially throttling economic activity. It creates hard questions in some countries about whether to intervene to prop up their currency in hopes of arresting capital outflows, as Indonesia did last week. The Fed's newly hawkish tone is in contrast to many of its counterparts, notably including the European Central Bank, which appears locked in on cutting rates in June. Meanwhile, the fundamentals driving U.S. growth, including large-scale investment in manufacturing capacity and the presence of superstar tech companies, mean global investors see strong potential returns in dollar assets, further tilting the playing field toward the greenback. Source Axios
Thoughts and Prayers for Those Hit by Major Storms in Iowa, Nebraska, and Oklahoma: At least four people were killed and dozens suffered injuries in multiple states after a string of tornadoes barreled through parts of the South and Midwest on Friday and into the weekend. Recovery efforts are underway after severe weather devastated parts of Oklahoma, Nebraska and Iowa. The National Weather Service reported that Iowa saw at least a dozen tornadoes on Friday, half of which were rated EF-2, which means they had wind gusts between 111-135 miles per hour. Parts of nearby Nebraska also suffered serious damage from multiple tornadoes. Nebraska Public Media reported that a series of tornadoes were confirmed to have hit the Omaha and Lincoln areas, damaging and destroying homes and other structures. Oklahoma declared states of emergency in a dozen counties: Carter, Cotton, Garfield, Hughes, Kay, Lincoln, Love, Murray, Okfuskee, Oklahoma, Payne and Pontotoc. A swath of Minden, Iowa — a small town roughly 30 miles northeast of Omaha — was leveled by a tornado. Iowa Gov. Kim Reynolds said Saturday that she had declared a disaster emergency for Pottawattamie County, where Minden is located. Source NPR
Why the AI Industry’s Thirst for New Data Centers Can’t Be Satisfied: The frenzy to build data centers to serve the exploding demand for artificial intelligence is causing a shortage of the parts, property and power that the sprawling warehouses of supercomputers require. The lead time to get custom cooling systems is five times longer than a few years ago, data center executives say. Delivery times for backup generators have gone from as little as a month to as long as two years. A dearth of inexpensive real estate with easy access to sufficient power and data connectivity has builders scouring the globe and getting creative. New data centers are planned next to a volcano in El Salvador and inside shipping containers parked in West Texas and Africa. The amount of data-center space in the U.S. grew 26% last year, according to real-estate firm CBRE, and a record amount was under construction. The price of available space is rising while vacancy rates are negligible—a sign that supply isn’t keeping up with demand. Bill Vass, vice president of engineering at Amazon Web Services, said a new data center pops up somewhere in the world every three days. It generally takes a year and a half or two years to put up a large, new data facility, said Jon Lin, the general manager of data-center services at Equinix, one of the world’s biggest data-center operators. It is difficult for the industry to suddenly scale up when demand skyrockets because of the extensive planning and supply-chain management required, he said. Source WSJ
Republic First Bank Seized By Regulators: Republic First Bancorp was seized by Pennsylvania regulators Friday, following a failed deal earlier this year to infuse the Philadelphia-based regional bank with new funds, amid a decline in deposits and a struggling mortgage lending business. Republic First reported a decline in deposits in a presentation to investors last year, which also indicated the value of the company’s mortgage loan portfolio had “declined substantially in a rising rate environment.” The company said at the time it would “wind down and exit” the mortgage business and instead focus on consumer deposits, of which about 60% were uninsured as of last June, The Wall Street Journal reported. The Norcross-Braca Group said in September it would invest $35 million into Republic First but backed out of the deal earlier this year. The Pennsylvania Department of Banking and Securities seized Republic First on Friday, following speculation the bank would be seized by regulators as it looked for a potential buyer. Fulton Bank reached an agreement to take over Republic First’s 32 branches. Republic First’s seizure is the fourth by federal or state regulators since the start of 2023, following the collapses of Silicon Valley Bank, Signature Bank and First Republic Bank, which were substantially larger than Republic First. Source Forbes
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