Wall Street is braced for an eventful week ahead, which includes the US Federal Reserve’s monetary policy decision, critical jobs data, and highly anticipated earnings results from big tech companies.
The Fed’s two-day meeting on Tuesday-Wednesday is expected to be somewhat of a non-event with the central bank seen leaving interest rates on hold at the current target rate of 5.25-5.50%.
There have been some high-profile economists and Wall Street insiders in the headlines lately trying to make a case for the Fed to cut rates at this week’s meeting. Most in this camp, such as former New York Fed boss Bill Dudley, are worried about the labor market, where the unemployment rate has risen the past three months in a row, pushing above +4% in June for the first time since November 2021.
They argue that to head off a more serious fallout in the jobs market, the Fed needs to cut before September. Remember, there is no Fed meeting in August. Traders put the odds of a rate cut this week at under 5% so it would certainly be a huge surprise if the Fed decided to go ahead and make its move. While most still expect the first rate cut at the September meeting, some traders are now thinking the Fed may start with a “jumbo” -50 basis point rate cut (11% odds vs 4% last week) rather than just a cut of -25 basis points (nearly 89% odds).
Wall Street is hoping that Fed Chair Jerome Powell during his follow-up press conference on Wednesday will signal that the central bank intends to begin cutting rates at the next meeting (September), and perhaps hint that more rate cuts will be coming in the months ahead, something that could calm the bubbling concerns about the economy starting to buckle.
The Fed’s decision on Wednesday comes ahead of the critical July jobs report, which is due on Friday. Most expect a slight slowdown in hiring to around 170,000 from 206,000 in June with the unemployment rate holding steady. The Job Openings and Labor Turnover Survey (JOLTS) on Tuesday and ADP’s private payroll report for July on Wednesday will also be closely watched for more clues about how the job market is holding up.
There is no economic data of note today.
On the earnings front, Wall Street is highly anxious to see results from big tech giants this week with Microsoft set to release results on Tuesday, Facebook-parent Meta on Wednesday, and Apple and Amazon on Thursday.
Overall, this week’s earnings schedule will be the busiest of the Q2 2024 season with over +160 S&P 500 companies reporting.
Bottom line, net profit margins have remained strong for many of the most heavily weighted S&P 500 companies, so bulls are able to explain and justify why the overall market continues to trade at a richer valuation than historical data would suggest, i.e. the bigger businesses are simply more profitable than we have historically seen in the past.
I'm not sure if that's because of changes made during Covid or, because of major technological advancements, or perhaps a blend of both.
But with many of the biggest companies still putting up big profit margins the market is justifying the pricier valuations.
US Office Loan Pain Is Only Starting to Ramp Up: Any hopes that falling borrowing costs would stem the pain from the US office downturn were swept away this week. A string of recent announcements by companies such as Blackstone and Deutsche Bank signal that lenders may not be able to just amend and extend loans in the hope that lower interest rates will ease borrowers’ pain and give property owners more time to refinance debt. More than $94 billion of US commercial real estate is currently distressed, according to MSCI Real Assets, with a further $201 billion at risk of slipping into that category. “As a $1.5 trillion wall of loan maturities hits over the next two years, the implications are profound,” John Murray and François Trausch at Pacific Investment Management Co. wrote in a note this week. “Lenders and borrowers will be forced to ‘face the music’: In the near term, we expect further declines in appraised valuations and price indices, making loan extensions even more difficult to rationalize.” Analysts at Pimco cautioned that the CRE damage will be long lasting even if the Federal Reserve begins to loosen monetary policy. Forward curves suggest borrowing costs will keep business property values 20% to 40% below their 2021 high, they said. Source Bloomberg
Walmart Looks to Bet $200 Million on Self-Driving Forklifts: The world's largest retailer wants autonomous forklifts to move pallets of goods in its distribution centers, which replenish Walmart stores. It has intended to buy possibly hundreds from Fox Robotics. A single human operator can manage up to six of the autonomous forklifts at a time, saving as much as 40% on labor costs, Fox Robotics said on its website. A worker is still needed to open warehouse doors, for instance, they added, but there's no comparison when it comes to overall production output. Analysts from Jefferies estimated the company could add $20 billion to its profit before interest and taxes by fiscal 2029, thanks to its efforts in automation and artificial intelligence. Asked how much Walmart was spending on automation overall, Walmart said it was investing billions of dollars into its supply chain network. Source Reuters
NORAD Intercepts Russian and Chinese Bombers Operating Together Near Alaska: The North American Aerospace Defense Command intercepted two Russian and two Chinese nuclear-capable bombers flying near Alaska last week. The US and Canada, which together comprise NORAD, intercepted the Russian TU-95 Bear and Chinese H-6 bombers. The intercept was carried out by US F-16 and F-35 fighter jets, as well as Canadian CF-18 fighter jets. This also marks the first time H-6 bombers, which are a derivative of older Soviet bombers, have entered the Alaska ADIZ, the defense official said. China’s Defense Ministry said the Chinese and Russian air forces had organized a “joint strategic aerial patrol in the relevant airspace of the Bering Sea.” Russia insisted the exercise was part of the 2024 military cooperation plan and “not directed against third countries.” Asked if the interception was an example of Russia and China “testing” the US in the wake of President Joe Biden’s decision to pull out of the 2024 presidential race, Defense Secretary Lloyd Austin said that Russia and China “are always testing us. This is the first time that we’ve seen these two countries fly together like that,” he added. Very interesting... Source The Hill
Israel Prepares to Retaliate Against Hezbollah in Lebanon: Israel’s government authorized a retaliatory strike against Hezbollah in Lebanon, amid an American-led diplomatic push to contain the fallout from a strike that killed 12 young people in the Israel-controlled Golan Heights. Israel and the U.S. have accused the Iran-backed militia Hezbollah of carrying out Saturday’s strike. Israel’s security cabinet held an hours long meeting Sunday and empowered Prime Minister Benjamin Netanyahu and his defense minister to decide on the character and time of retaliation against Hezbollah. The Israeli military already struck several targets deep in Lebanon on Sunday morning in response to the attack. Hezbollah, a U.S.-designated terrorist group that controls southern Lebanon, said it had nothing to do with the deaths but claimed responsibility for other attacks in the area on Saturday. Israel’s military said that an Iranian-made Falaq-1 hit a soccer field and that it was launched from the vicinity of Chebaa, a southern Lebanese village. All sides have indicated they aren’t interested in widening the conflict, but chances of a miscalculation remain high. Any full-blown war between Israel and Hezbollah could cause widespread death and destruction in both countries. During their last war in 2006, Israel bombed Beirut’s civilian airport and other infrastructure, and Israeli Defense Minister Yoav Gallant said in June that Israel was capable of bombing Lebanon “back to the stone age.” Source WWJ
Hezbollah is one of the most heavily armed, non-state military forces in the world. It is funded and equipped by Iran. Sheikh Hassan Nasrallah has claimed that it has 100,000 fighters, although independent estimates vary between 20,000 and 50,000. Many are well trained and battle hardened, and fought in the Syrian civil war. It has an estimated 120,000-200,000 rockets and missiles, according to the Center for Strategic and International Studies think tank. Most of its arsenal is made up of small, unguided surface-to-surface artillery rockets. But it also thought to have anti-aircraft and anti-ship missiles, as well as guided missiles capable of striking deep inside Israel. This is much more sophisticated than what Hamas, in the Gaza Strip, has at its disposal. Source BBC
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State Grids Can’t Handle AI: Thanks to the artificial intelligence boom, new data centers are springing up as quickly as companies can build them. This has translated into huge demand for power to run and cool the servers inside. Now concerns are mounting about whether the U.S. can generate enough electricity for the widespread adoption of AI, and whether our aging grid will be able to handle the load. “If we don’t start thinking about this power problem differently now, we’re never going to see this dream we have,” said Dipti Vachani, head of automotive at Arm. The chip company’s low-power processors have become increasingly popular with hyperscalers like Google and Microsoft — precisely because they can reduce power use by up to 15% in data centers. This strategy of reducing power use by improving compute efficiency, often referred to as “more work per watt,” is one answer to the AI energy crisis. But it’s not nearly enough. One ChatGPT query uses nearly 10 times as much energy as a typical Google search, according to a report by Goldman Sachs. Generating an AI image can use as much power as charging your smartphone. The aging grid is often ill-equipped to handle the load even where enough power can be generated. The bottleneck occurs in getting power from the generation site to where it’s consumed. One solution is to add hundreds or thousands of miles of transmission lines. Source CNBC
States With the Highest Car Insurance Costs: The cost of car insurance is hitting high water marks nationwide, though drivers in some states are feeling the pain more than others. Fast-rising insurance rates are contributing to a transportation affordability crisis, especially in the many parts of the country where people have few alternatives to car ownership. The nationwide average annual cost of full-coverage car insurance hit $2,329 in June, per Insurify, a digital insurance agent that helps users collect quotes from multiple insurers. That's up from $1,601 in January of 2021. Rates are highest in Connecticut ($3,598), Maryland ($3,400) and South Carolina ($3,336), while they're lowest in New Hampshire ($1,000), Maine ($1,209) and North Carolina ($1,403). Insurify's monthly figures are two-year rolling medians to account for "extreme market volatilities" in recent years, the company says. And they're based on rates for drivers between ages 20-70 with clean driving records and at least average credit scores. Several factors play into the difference in rates between states, including road conditions, accident rates and whether a state requires no-fault coverage (meaning plans must cover medical expenses regardless of who's at fault in an incident). "Rate increases this year are largely a continuation of hikes in 2023, a year that saw full-coverage premiums rise by +24% in response to insurers' record underwriting losses the year prior," Cassie Sheets, data journalist at Insurify. Source Axios |
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