But when Fed Chair Powell held his press conference he was actually a bit more dovish than anticipated. Powell noted that the Fed has already aggressively tightened (10 consecutive rate hikes) and that the balance sheet is shrinking at a good pace. He also said that holding rates at this level is a way to further cool inflation and that the earliest signs of disinflation are starting to show and that the conditions we need to see to get inflation down are coming into play – loosening labor markets, improving supply chain, growth below potential, etc. Chair Powell, however, didn't sound too hip on the idea of a possible rate-cut in 2023, which the market seems to have already tossed out the window.
Bottom line, the Fed is going to remain data-dependent and seems prepared to hike a couple of more times in 2023 if hotter inflation starts to fire back up. It also sounds like the Fed is prepared to leave rates higher for longer until inflation gets down closer to its longer-term target.
Keep in mind, we will now start to hear from a wave of Fed speakers. Fed Chair Powell is scheduled to speak before the Senate next Thursday, June 22. The next Fed FOMC meeting is scheduled for July 26. Bulls are mostly optimistic, pointing to the Fed's own fresh set of economic projections that raised the outlook for GDP (Gross Domestic Product) and lowered the unemployment forecast.
Bears however believe additional rate hikes almost certainly guarantee a recession and a respective hit to earnings later this year and/or into the early part of 2024. Bears are also questioning the Fed's growth outlooks, particularly with additional headwinds coming up. Those include the resumption of student loan payments, which is estimated to drain +$5 billion per month out of consumer budgets. Another is the expected slowdown in bank lending that most think will have an outsized impact on small businesses, which employ almost half of all US workers.
Bears also point out that the yield curve remains deeply inverted (when short-term Treasury rates exceed longer-term rates). The yield curve has got a recession forecast wrong just once in the past 40 years and some economists actually believe that the phenomenon itself might be the catalyst behind these downturns. Others argue that the formerly reliable signal has lost its potency due to the Fed's rate manipulations - first holding them so low at near zero and then raising them at the fastest pace in 40 years.
Investors have a slew of economic data to digest today, including the Philadelphia Fed Manufacturing Index, Empire State Manufacturing, Retail Sales, Import/Export Prices, Industrial Production, and Business Inventories. Earnings are due today from Adobe and Kroger.
Who's Spending Less, You Might be Surprised: Dllars themselves are now worth about -4% less than last year, thanks to inflation, this means that spending in real terms is down across all age groups except our oldest or the “silent” generation. That's right, those age 78 or older have actually been spending about +5% more than last year. Some say it's because of the large increase in social security, monthly checks jumped +8.7%, following last year’s surge in inflation. Meanwhile, Generation X, millennials, and Gen Z are now spending about -2% less than a year ago. Baby Boomers are spending about +2% more. Bank of America says that baby boomers, those aged 59 to 77, are the wealthiest generation. In total, they hold about $73 trillion in assets or about eight times as much as millennials Source Market Watch
Millionaires Are Fleeing China in Droves as Economic Rebound Fizzles: China will see a net loss of 13,500 high-net-worth individuals in 2023, up from 10,800 in 2022, according to the Henley Private Wealth Migration Report. The world's second-largest economy continues to lead in the number of lost millionaires, a trend that has been going on over the last decade, according to Henley. General wealth growth in the country has been slowing over the past few years, which means that the recent outflows could be more damaging than usual, according to Andrew Amoils, head of research at New World Wealth, in Henley's report. After China's economy expanded strongly from 2000 to 2017, the growth of millionaires since then has been negligible, and in more recent years, bans by the US and other countries on Huawei technology was a major blow for China. Meanwhile, the US will see a net gain of 2,100 millionaires, up from 1,500 last year Source YahooFinance
Big Companies on Verge of New Market for Clean-Energy Tax Credits: The Biden administration is setting the stage for large companies to start buying clean-energy tax credits, kick-starting a new market at the core of last year’s climate law. The system is designed to bring fresh sources of capital to projects that produce wind energy, solar power, clean hydrogen and batteries, among others. The Treasury Department on Wednesday proposed rules explaining how clean-energy developers can sell the credits. Many companies that generate clean energy don’t make enough profit to use all of the tax credits they could claim. So under the new rules, which are part of last year’s Inflation Reduction Act, a utility-scale solar installation could sell its tax credits to a tech company that had no involvement in the project but was looking for a lower tax bill. The previous path to monetizing otherwise unusable tax credits was a relatively clunky system known as tax-equity financing. It requires significant transaction costs and mostly attracted interest from banks and insurance companies. Lawyers and deal makers expect tax credits to sell at a discount, with prices varying based on the record of the project developer and other factors. Many expect prices to exceed 90 cents on the dollar, so that a large company might pay more than $90 million for $100 million of tax credits. Source WSJ
IEA Sees Oil Demand Peaking By End of Decade: Global demand for oil is set to hit a peak by the end of this decade, the International Energy Agency said Wednesday, as volatile energy prices accelerate a shift to clean alternatives following the Covid-19 pandemic and Russia’s invasion of Ukraine. The IEA forecasts global oil demand will rise to 105.7 million barrels per day in 2028, an increase of around +6% compared with 2022. The agency said global demand for oil used in transportation will begin declining in 2026, thanks to a shift to electric vehicles and policy measures pushing for more efficiency. Demand growth for gasoline is set to reverse at the end of this year, while the rise in demand for “combustible fossil fuels” will peak in 2028, the report adds. Meanwhile, demand growth for oil will slump to just +400,000 barrels per day in 2028—compared with +2.4 million barrels per day in 2023. As air travel rebounds following the removal of pandemic-related travel restrictions, aviation fuel will be the biggest driver of demand during the five-year period assessed by the report. At the start of 2023, demand for jet fuel remained -13% below 2019 levels and is expected to surpass pre-pandemic levels by 2027. Source Forbes
Google May be Forced to Sell Off Key Businesses: The European Commission has hit Alphabet’s Google with antitrust charges over its behavior in the advertising technology business, which is the company’s biggest earner. The Commission, which has been probing the matter for the past two years, will now launch a formal antitrust investigation. If that confirms its suspicions, it said it may order Google to break up its adtech business. Google has a major presence in every major part of the adtech value chain—its ad-buying tools and publisher ad server (used to manage advertising space on sites and in apps) are dominant in their fields, and Google’s AdX is the biggest ad exchange out there. The Commission said the U.S. giant has for nearly a decade been using its DoubleClick for Publishers (DFP) ad server and its Google Ads and DV 360 ad-buying tools to unlawfully favor AdX Source Fortune
Wage Growth Catches Up With Inflation: For the first time in two years, Americans are getting raises at work that might actually mean something. That's because they're finally seeing an increase in average hourly pay that's bigger than the overall bump in prices, known as real wage growth. In the month of May, prices overall rose a less-than-expected 4% from May 2022. In comparison, average hourly wages were up 4.3% over the same time period. After some rounding and the Bureau of Labor Statistics' seasonal adjustments to compensate for changing employment and wage patterns from month to month, that's a 0.2% increase in real wages. In the graph below, you'll see wages are seeing real growth when the yellow and blue lines intersect with blue coming out on top. May was the first time that's happened since March 2021. That's despite the strongest wage growth in decades — inflation was simply stronger Source Insider
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