Interestingly, the trade has somewhat changed its mind about rate cuts coming later this year, now giving the best odds at one more rate hike this year then a long pause into mid-2023.
Remember, rates higher for longer is what many bears say will hurt the stock market as it squeezes corporate profits and can negatively impact consumer spending. Central bank decisions are also due from the European Central Bank on Thursday and the Bank of Japan on Friday. Last week, both the Bank of Canada (BOC) and Reserve Bank of Australia (RBA) surprised investors with rate hikes. Both banks had previously paused hikes but cited inflation that remains too high, strong consumer spending, and tight labor markets in last week's policy decisions.
RBA has hiked twice now following a pause in April and indicated that more will likely be required. The BOC's rate hike was the first since January. While both economies are smaller than the US, all three are dealing with similarly stubborn inflation pressures.
Not surprisingly, the decisions by BOC and RBA are challenging expectations by some investors that a "pause" in the US Fed's rate hikes will be followed by rate cuts later this year.
Investors still largely expect a pause at this week's meeting, which begins Tuesday and concludes Wednesday with the Fed's latest decision.
Fed Chair Jerome Powell will also hold a follow up press conference on Wednesday. The Fed will also release updated economic projections on Wednesday, which will include the closely-watched "dot plot" showing each official's projection for the central bank’s key benchmark rate at the end of each calendar year for the next three years.
The March update showed officials expected rates to peak this year at 5.1%, or a target rate of 5.0%-5.25%, which is the current level. Key to the Fed's future moves is inflation which has come down from its peak but remains more than double the central bank's target of around +2%.
The May Consumer Price Index (CPI) will reveal the latest inflation trends with analysts expecting the headline rate to dip to +4.1% from +4.9% previously, and the "core" rate (strips out food and energy) slowing to +5.3% from +5.5% in April.
The Fed prefers "core" inflation measures and the fact that this remains so much higher than the headline read is a key reason many economists anticipate the Fed will need to resume rate hikes later this year and little chance for rate cuts before 2024, at the earliest.
The prospect of higher-for-longer rates is something the Fed has been warning about for a long time now, along with warnings that the economy will likely decelerate as a result.
Fed economists have previously warned that the US would probably slip into recession due to a combination of high interest rates and tighter bank lending, a scenario that bears warn is no longer priced into stocks. In fact, earnings expectations for the second half of the year have only risen since Q1 results came in better-than-expected.
While an earnings decline of -6.4% is expected in Q2 for S&P 500 companies, Q3 earnings growth is pegged at +0.8% and Q4 is seen climbing +8.2%. It's worth noting that Amazon, Facebook-parent Meta Platforms, Google-parent Alphabet, and Nvidia are expected to account for nearly half the projected growth in Q4 earnings, according to FactSet. In fact, analysts are projecting more than +100% year-over-year growth in Q4 alone for Amazon, Meta, and Nvidia. Nvidia's stock prices is already nearly triple what it was at the start of this year and Meta has more than doubled. Today, Oracle is the earnings highlight.
There is no economic data on the calendar.
Goldman Reporting More Bad Commercial Real Estate Loans: The value of loans to commercial real estate borrowers (CRE) behind on repayments climbed +612% in the first quarter to $840mn, according to reports filed by Goldman’s licensed banking entity with the US Federal Deposit Insurance Commission. That was much higher than the rise in delinquent CRE loans reported by the entire US banking industry, which were up +30% over the same period to just over +$12 billion, according to Bankingregdata.com, which collates the FDIC reports. Keep in mind, other banks are warning over growing losses on commercial real estate loans, most of which are tied to office buildings and loans that were made before the pandemic ushered in a work-from-home culture. Source Financial Times
Pennsylvania Couple Keeps America's Oldest Drive-In Theater Alive: Nine miles northwest of Allentown, Pennsylvania, sits America's oldest drive-in movie theater, first opened in 1934. While it was originally the second drive-in theater to open in America, Shankweiler's Drive-In Theatre is now the only one left from the early 1930s. The theater was opened by Wilson Shankweiler, who originally called it Shankweiler’s Park-In Theatre. Currently, there are around 300 drive-in movie theaters operating in the U.S., with 29 located in Pennslyvania. Since its opening, the theater has changed ownership multiple times and as the theater nears its 90th birthday, two new owners have taken control of the operation. Lauren McChesney and Matthew McClanahan bought the theater in November 2022 after they heard it was on the path to becoming a gas station. Hearing the news and knowing about the history of Shankweiler's, he said the couple decided it was the perfect time to buy the business. It's been in continuous operation since 1934, there was never a point where it closed and was abandoned or anything like that. It's been running. It's been up kept. It's been popular and well-attended ever since, according to McChesney. Since the couple bought the theater, they have initiated new experiences at the drive-in while keeping its historical feel. Recently, the theater remained open during the winter months, where it screened holiday movies and brought in visitors from across the U.S. as one of the only drive-ins still operating. Source USA Today
Goldman Sachs Slashes Brent Outlook to Below $90 by Year-End: Goldman Sachs Group Inc., one of the most bullish banks on the outlook for oil, has once again lowered its price forecasts amid increasing global supplies and waning demand. The bank has now dropped its Brent forecast for December to $86 a barrel, down from its previous estimate of $95 a barrel. This is Goldman’s third downward revision in the last six months after having previously stood by its bullish $100-a-barrel prediction. Brent’s August contract settled at $74.79 a barrel on Friday. Supply increases from nations facing sanctions — Russia, Iran and Venezuela — are a key driver in the lower price outlook, according to Goldman. Russia supply production, in particular, has “nearly fully recovered” despite sanctions from Western countries. Recession fears are also weighing on prices, with higher interest rates likely to be a “persistent headwind” to higher prices. Source Bloomberg
Fortune 500 Reveal Record Revenues but Plummeting Profits: Every year, the Fortune 500 offers a snapshot of what the biggest and mightiest in American capitalism are up to. The 69th annual list also uncovered a funny thing on corporate balance sheets. Revenues hit a record high, but profits fell—by a lot. Amid an economic climate full of doom-mongering about a coming recession, a commercial real estate “apocalypse,” and a debate about “greedflation” being the reason for soaring prices, the Fortune 500 snapshot from 2022 is trying to tell us something. But is it a sign of an imminent recession or is this just a return to normal? In 2021, Fortune 500 companies earned $1.84 trillion in profits on $16.1 trillion in revenue. But last year, although revenue rose to $18.1 trillion, profits dropped roughly -15% to $1.56 trillion. The trend came as rising interest rates increased borrowing costs for many Fortune 500 companies during the year, helping to chip away at margins even as inflation allowed for higher prices. The ailing tech sector also saw its profits sink sharply amid the e-commerce slowdown and return to office trend. It’s not just Fortune 500 companies that are experiencing falling profits, either. Total after-tax U.S. corporate profits fell roughly 12% between their peak in the second quarter of 2022 and the first quarter of this year, according to data from the St. Louis Federal Reserve. Investment banks and hedge funders have consistently warned about the potential for profits to drop as the economy slows under the weight of rising interest rates. Source Fortune
Newest Employee at Elon Musk's SpaceX is 14 Years Old: The latest recruit at SpaceX is a software engineer who passed its "technically challenging" and "fun" interview process. What's different about Kairan Quazi is that he's just 14 years old. The news of his new job came shortly before his graduation from Santa Clara University's school of engineering, becoming the youngest person to do so, the Seattle Times reported. He's planning to make the move from Pleasanton, California with his mother to start work at SpaceX in Redmond, Washington, per the report. Quazi's extraordinary journey started at the age of two, when he could speak in complete sentences. After finding that his schoolwork wasn't challenging enough in the third grade, aged 9, his parents helped him enroll at a community college in California. Quazi landed an internship as an AI research co-op fellow at Intel Labs a few months later and by the age of 11 he transferred to Santa Clara University to study computer science and engineering. Source Insider
Slowdown in Rent Increases Good News for Inflation: Fortunately for renters considering a move this year, and for those watching the outlook for inflation, rent increases this spring have been slower than usual. Unfortunately for renters in the nation’s largest city, that doesn’t include New York. At $2,048, Zillow's measure of the nation’s typical asking rent price in May represents a continued slowing in cost increases after rents soared earlier in the pandemic. Rents nationally increased by 0.6% between April and May, according to Zillow—about even with April’s increase but a slightly slower gain than the 0.7% typical for this time of the year. Rental growth has been moderating since reaching a high of a +17% year-over-year increase in February 2022, Zillow said. At the national level, Zillow senior economist Jeff Tucker says he expects rents to grow more slowly than they did before the pandemic. The continued slowing in national rent growth is a positive omen for inflation metrics. The Consumer Price Index subsection measuring the cost of shelter has remained relatively hot, even as increases in asking rents have declined. Tucker expects both the Bureau of Labor Statistic’s measure of rent and its measure of owners’ equivalent rent, or what a homeowner estimates it would cost to rent their home, to soon begin to cool on a year-over-year basis. Source Barrons
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