Powell also reiterated that the timing of any rate further hikes will remain data dependent at each upcoming meeting. Overall, Powell's remarks didn't really provide any new insights beyond what investors already learned from the Fed's meeting last week.
Bears are noting that Powell did highlight the growing headwinds for the economy from tighter credit conditions, "which are likely to weigh on economic activity, hiring, and inflation.” At the same time, Powell admitted that the Fed is not sure what the extent of those effects will be.
Wall Street is divided over the potential impacts as well with bulls thinking the US economy will tread water until the Fed ends its hiking cycle, while bears believe recession is the more likely outcome.
Maybe more importantly, bears believe the slump in corporate profits is going to continue. Keep in mind, earnings for S&P 500 companies have already declined for two straight quarters (Q4 2022 and Q1 2023) and analysts expect a repeat in Q2. Bulls have been betting on a turnaround in the second half but much of that optimism is dependent on a more accommodative
Fed, as well as a still-strong consumer. The circumstances that drove the recent earnings declines - slower consumer demand, high interest rates, and high operating costs - have not changed to any substantial degree, however, and Q3 begins in less than two weeks.
It's also true that companies themselves are forecasting a return to profit growth in Q3, some of which will be driven by a continuation of price increases. While that may keep profits on track, it could also keep inflation buoyed, in turn keeping the Fed in the rate-hiking game.
Companies relying heavily on higher prices to boost margins also run the risk of driving away consumers that are already struggling to stretch their budgets any further.
Tighter lending standards and even higher interest rates could also exacerbate the strain on both consumers and businesses.
The average mortgage interest rate for a standard 30-year fixed mortgage is 6.99%. The average mortgage interest rate for a standard 15-year fixed mortgage is 6.43%. The average rate on a 5/1 adjustable rate mortgage (ARM) is 6.07%.
Today, investors will be tuning in to Powell's second day of testimony, this time in front of the Senate Banking Committee, where he will likely rehash much of what was already stated yesterday.
The main data highlight is Existing Home Sales for May, which are expected to be down more than -23% compared to last year. On the earnings front, Accenture and Darden Restaurant are the key releases.
America's Charitable Giving Declines For Only the Fourth Time in 40 Years: After years of record-setting generosity, charitable giving declined in 2022, marking only the fourth year-over-year decrease since 1982. With inflation and a down stock market squeezing wallets, total charitable giving fell to $499.33 billion in 2022, down 3.4% in current dollars from 2021, or 10.5% after adjusting for inflation, according to Giving USA 2023: The Annual Report on Philanthropy for the Year 2022. Charitable giving hit a record high of $516.65 billion in 2021 and the decline in 2022 “is a rare occurrence as total giving has only decreased in current dollars three other times in the past 40 years: in 1987, 2008, and 2009,” according to a statement from Giving USA. It’s not a coincidence that previous declines in charitable giving happened in years when there were stock-market reported a sizable pullback. Source Market Watch
"SPAC King" Says to Prepare for the Massive Debt Wall Coming for Corporate America: In a Monday tweet, Chamath Palihapitiya, the Social Capital founder warned that hundreds of billions of dollars in debt that was issued during the pandemic when rates were near zero will start to come due in January of next year. In fact, high-yield bond sales peaked in October 2021 at over $432 billion, according to Bloomberg. US junk bonds now hold the shortest average time to maturity on record as investors pursued quicker due dates out of fear of a coming recession, the report said. Prepare for a bunch of companies who will not be able to refinance their debt and will thus see their equity value incinerated, Palihapitiya wrote, adding this will hit the private equity industry very acutely, whose core playbook involves wrapping their companies in gobs of high yield debt. Palihapitiya also said we should expect a bunch of articles about potential corporate bankruptcies starting this fall…lots of money to be made if you're paying attention Source Business Insider
Fewer Homes for Sale in May Than Any Other Month on Record: The number of homes for sale in the U.S. fell -7.1% year over year to 1.4 million on a seasonally adjusted basis in May. That’s the lowest level in Redfin’s records, which date back to 2012, and the first annual decline since April 2022. By comparison, there were 2.2 million homes for sale in May 2019—before the pandemic rocked the U.S. housing market—meaning housing supply was -38.6% below pre-pandemic levels this May. America’s housing stock is dwindling because there are very few people selling homes. New listings of homes for sale declined -25.2% year over year in May to the third lowest level on record on a seasonally adjusted basis, as homeowners were handcuffed by high mortgage rates. Nearly every homeowner with a mortgage has an interest rate below 6%, meaning many are opting to stay put because selling and buying a new home would mean taking on a higher monthly mortgage payment. The average 30-year-fixed mortgage rate in May was 6.43%, up from 5.23% a year earlier and a record low of 2.65% in 2021. As the pool of homes for sale shrinks, homebuyers in many markets are grappling with competition, which is preventing home prices from plunging despite a cooldown in buyer demand. The median U.S. home sale price was $419,103 in May. That’s down just -3.1% from a year earlier, when prices hit a record high of $432,311. While home prices fell in May, they posted a smaller decline than they did in April, when prices dropped -4.2% from a year earlier—the largest decrease on record with the exception of January 2012. Source Redfin
FTC Sues Amazon Over "Deceptive" Prime Sign-Up and Cancellation Process: The Federal Trade Commission on Wednesday sued Amazon, alleging the nation’s dominant online retailer intentionally duped millions of consumers into signing up for its mainstay Prime program and “sabotaged” their attempts to cancel. Amazon spokesperson Heather Layman said in a statement that the FTC’s claims are “false on the facts and the law.” The FTC had been investigating sign-up and cancellation processes for Amazon’s Prime program since March 2021. Launched in 2005, the Prime program has grown to become one of the most popular subscription services in the world, with more than 200 million members globally, and it has generated billions of dollars for Amazon. Source CNBC
How America's Top CEOs Plan to Use AI: Amidst all the media frenzy surrounding A.I., it can be hard to discern the genuine applications of A.I. from unwarranted commercial hype and paralyzing societal alarmism. At the 134th Yale CEO Summit last week, 200 top CEOs across sectors provided valuable insights into how America’s largest businesses are actually integrating A.I. to transform their business models. These CEOs are mostly applying the new technology to solvable problems while steering ingenuity towards the areas where humans cannot be replaced: human empathy, judgment, synthesis, and novel originality, where artificial intelligence cannot yet match genuine intelligence. It's a bit more complicated in reality for industry's like marketing. Citing Coke’s recent novel consumer-driven A.I. ad campaign, in which A.I.-generated ads were indistinguishable from human-created advertising, Coca-Cola CEO Jim Quincey raised the specter that the days of companies shelling out billions for professionally created marketing content could potentially be coming to a close. For CEOs of major retailers, as Walmart CEO Doug McMillon reminded, A.I. is the means to an end rather than the end itself. “It’s important for us to realize and stay focused on what we’re trying to solve for and not get enamored with any particular technology, whether A.I. or otherwise,” McMillon said. Source Fortune
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