Commentary-Standard

Stock bulls took a step back to start the week as bond yields move sharply higher. Bond yields really began gaining strength last Friday following the much stronger than expected January jobs report that increased doubts about the timing of Federal Reserve rate cuts.

Those doubts were reinforced yesterday by the ISM Non-Manufacturing Index that showed the US service sector expanded at the fastest pace in four months, while costs jumped to the highest level since February 2023.  

According to ISM economists, the surge in prices is being driven by higher shipping costs due to unrest in the Red Sea and the issues at the Panama Canal. The report showed +35% of industries reported paying higher prices for materials, the largest share in a year. Notably, the ISM Manufacturing report last week also showed a spike in costs related to shipping headwinds.

That obviously raises red flags about inflation returning as those costs could eventually be passed on to consumers, depending on how long shipping rates remain elevated. Many on Wall Street are now more seriously walking back their outlooks for Fed rate cuts.

According to the CME FedWatch Tool, traders place the odds of a 25 basis point rate cut in March at around just 15% now, versus almost 50% last week and 64% a month ago.

Traders have also lowered the number of rate cuts expected in 2024, with most now expecting four or five 25 basis point cuts versus as many as six previously.

The “higher for longer” Fed rate outlook also means investors are likely recalibrating their outlooks for stock prices, as much of the market’s bullish momentum has been based on hopes for much looser financial conditions in the quarters ahead.

Earnings this week may not provide much of a boost to sentiment with big tech results now mostly in the rearview. It’s not that results beyond the big tech companies are insignificant, they just don’t tend generate the same “sexy” headlines that get the bulls fired up. Earnings highlights today include Amgen, BP, Carrier Global, Chipotle, Edwards Lifesciences, Fiserv, Ford, Gilead Sciences, Eli Lilly, Nintendo, Snap, Spotify, and Toyota.

Iran-Backed Groups Continue to Target American Bases as U.S. Plans Further Strikes: A strike near a U.S. base in Syria killed six members of a U.S.-allied militia Monday, the group said, despite the U.S. pounding Iran-allied militia sites with airstrikes over the weekend, underscoring the challenge Washington faces in its goal of keeping the conflict in the Middle East contained. The Islamic Resistance in Iraq, an umbrella of Iran-backed armed groups, claimed responsibility for the attack. Iran-aligned militias in Iraq and Syria have carried out more than 165 attacks on American bases with rockets, missiles, drones or mortars in recent months. In response, Washington carried out 85 airstrikes on Tehran-backed militias in Syria and Iraq on Friday. Over the weekend, U.S. and U.K. forces launched dozens of strikes on Houthi rebel sites in Yemen, where the Iran-backed group has launched attacks on commercial and U.S. naval vessels. Some Middle East experts question whether the U.S. can successfully contain the various militias that make up Iran’s so-called “axis of resistance,” which spans several countries across the Middle East, while Israel continues its war against Hamas.  Source WSJ

‘Shrinkflation’ Is Everywhere:  In case you missed the White House memo, the U.S. economy is fantastic as stock prices and jobs are booming, inflation and mortgage rates are falling, and yet many Americans remain unhappy. One explanation could be that government measures of inflation don’t fully reflect rising prices. Sure, headline inflation is moving closer to the Federal Reserve’s 2% target, but these statistics can be deceiving. Shrinkflation, paying the same price for noticeably smaller quantities of the same thing, isn’t appearing only in the grocery aisle, it’s everywhere. Americans may be paying around the same prices as they did a year ago, but they are often getting less. Take airline fares, which the Labor Department’s consumer-price index shows fell -9.4% during 2023. That sounds nice until you consider that the calculation heavily weighs the “lowest available fare” for a trip—typically offered by budget airlines. Keep in mind, however, that while budget airlines have been slashing their fares to attract more customers, legacy carriers have also increasingly unbundled their prices to compete. That’s why you’ll have to pay +$50 extra if you don’t want to be assigned seat 32B, plus +$30 more for a carry-on. Alas, the era of free money has ended, and businesses and their investors are prioritizing profitability. That means higher prices. Consider video streaming services, most of which have been losing money. Several increased prices last fall by around 20%. Disney+’s ad-free service rose from $11 a month to $14. Yet the CPI shows that prices for video subscription services have risen a mere 2% over the last year. Shrinkflation has even come for your Amazon Prime account. The company on Jan. 29 began charging an extra $2.99 a month, or $35.88 a year, a 20% premium over a standard Prime subscription to stream movies and TV shows without ads.  Source WSJ

Wall Street Snubs China for India in a Historic Markets Shift: A momentous shift is under way in global markets as investors pull billions of dollars from China’s sputtering economy, two decades after betting on the country as the world’s biggest growth story. Much of that cash is now heading for India, with Wall Street giants like Goldman Sachs Group Inc. and Morgan Stanley endorsing the South Asian nation as the prime investment destination for the next decade. Investors are paying close attention to the contrasting trajectories of two of Asia’s greatest powers. India, the world’s fastest-growing major economy, has vastly expanded infrastructure under Prime Minister Narendra Modi in his bid to lure global capital and supply lines away from Beijing. China, on the other hand, is grappling with chronic economic woes and a widening rift with the Western-led order. While the bullish sentiment about India isn’t new, investors are more likely now to see a market that resembles the China of times past: a vast, dynamic economy that’s opening up to global money in novel ways. Nobody expects a smooth ride but most are making the crossover anyway, calculating that the risks of betting against India are greater. Capital flows reflect the enthusiasm. In the US exchange-traded fund market, the main fund buying Indian stocks received record inflows in the final quarter of 2023, while the four largest China funds combined saw outflows of almost $800 million.  Source Bloomberg

Delay in Rate Cuts Could Dent Home Buying Season: The housing market looks set to begin its busy season the same way it ended last year: with high home prices and rising mortgage rates. The 10-year Treasury yield, a benchmark for mortgage rates, rose to  4.163% on Monday. Combined with Fridays’ increase, it was the largest two-day gain since June 2022.  Such a gain pushed one measure of mortgage rates above 7% for the first time since mid-December. The recent rise in rates, combined with still-high prices, could put pressure on prospective buyers as the typically busy spring season approaches. The median home sold for $361,245 in the four weeks ended Jan. 28, according to Redfin, up +5.5% from one year prior.  Source Barrons