Wall Street is again heavily debating what the impacts of further interest rate hikes will mean for corporate earnings and the overall economy. Federal Reserve Chair Jerome Powell yesterday indicated that the central bank could lift rates at each of its next two policy meetings, which are scheduled for July 25-26 and September 19-20.

Traders give odds of nearly 82% for a +25 basis-point hike in July but only about 16% odds for another hike in September. In fact, the majority bet is still that rates end the year at 5.25%-5.50%, which would mean only one more quarter-point hike this year.

A lot of bulls now believe that the economy can withstand that, especially based on recent data that indicates consumers remain resilient and some parts of the economy might even be growing. Bulls also believe that a continuation of "deflation" may help offset downturns in other areas because lower prices would, in theory, allow consumers to continue spending at current levels.

Consumer spending accounts for around two-thirds of gross domestic product so keeping that buoyed is an important piece of the puzzle. However, robust consumer spending has also been partially blamed for the current inflation mess.

Interestingly, Fed Chief Powell yesterday said, “What’s really driving it...is a very strong labor market.” Powell also stressed that the US Fed's monetary policy hasn't been restrictive for very long, pointing to ongoing economic and employment growth. For those keeping track, the Fed has lifted rates at every meeting since March 2022 before opting to pause in June. Rates have gone from near-zero to 5.0%-5.25% in that time, the fastest pace of tightening in the Fed's history. And yet, unemployment is at a still-low 3.7%.

It's worth noting that other central bankers in attendance at yesterday's event also indicated that rate hikes were likely to continue, meaning money everywhere is going to cost even more. That is one reason it's tough for the bears to understand how the stock market is going to be able to maintain these levels, considering that so many companies have become highly dependent on debt to fuel growth.

Bears also feel that the Fed is aiming squarely at the labor market, meaning even if inflation continues to trend down, officials may still hold rates high until the job market is in better balance.

Most economists consider a "healthy" unemployment rate to be around 4.5%. Unfortunately, it will take millions of job losses to reach that level.

Today, investors will be digesting the final estimate of Q1 2023 GDP and Pending Home Sales, as well as earnings from McCormick & Co., Nike, and Paychex.

NEW Malaria Cases Detected in US, First Time in Decades: The Centers for Disease Control and Prevention (CDC) has issued a health advisory over the spread of a few malaria cases in Florida and Texas, marking the first time locally acquired infections of the disease have been detected in the U.S. in 20 years. Five cases of malaria caught by people in the U.S. have been identified so far, four in Florida and one in Texas, in the past two months. The fact these individuals were infected in the U.S. is what is causing concern among health officials as infections like these haven’t been seen in a long time. Malaria was once extremely common in the U.S., but its status as an endemic disease in the country was ended after the National Malaria Eradication Program that took place during the 40’s and 50’s. Malaria is considered a “medical emergency” by the CDC that can be fatal, particularly among children under five and pregnant women. Symptoms can range from mild to life-threatening. Symptoms can be flu-like and also include an enlarged spleen, enlarged liver or mild jaundice. One of the hallmark symptoms of malaria is what’s called a “malaria attack” in which an infected individual experiences a distinct period of illness that lasts six to 10 hours. These attacks are defined by three stages: a cold stage of chills and shivering; a hot phase of fever, headaches, vomiting and potentially seizures in children; and a sweating stage in which they return to a normal temperature. Patients cycle through these attacks over the course of their infection. Source The Hill

Fed Says 23 Biggest Banks Survived Severe Recession in Stress Test: All 23 of the U.S. banks included in the Federal Reserve’s annual stress test weathered a severe recession scenario, the regulator said Wednesday. The banks were able to maintain minimum capital levels, despite $541 billion in projected losses for the group, while continuing to provide credit to the economy in the hypothetical recession, the Fed said in a release. Begun in the aftermath of the 2008 financial crisis, which was caused in part by irresponsible banks, the Fed’s annual stress test dictates how much capital the industry can return to shareholders via buybacks and dividends. In this year’s exam, the banks underwent a “severe global recession” with unemployment surging to 10%, a -40% decline in commercial real estate values and a -38% drop in housing prices. The test examines giants including JPMorgan Chase and Wells Fargo, international banks with large U.S. operations, and the biggest regional players including PNC and Truist. Banks are expected to disclose updated plans for buybacks and dividends Friday after the close of regular trading. Given uncertainties about upcoming regulation and the risks of an actual recession arriving in the next year, analysts have said banks are likely to be relatively conservative with their capital plans. Source CNBC

Supreme Court Case Could DRAMATICALLY Change Wealth Taxes: Taxation of unrealized gains is at the core of a case that the U.S. Supreme Court on Monday agreed to take up and that could change the way wealth is taxed in the U.S. The plaintiffs in Moore v. United States argue that a mandatory repatriation tax, introduced by the 2017 Tax Cuts and Jobs Act (TCJA), is unconstitutional. The one-time tax is levied on U.S. taxpayers with a specified amount of ownership in certain foreign corporations. The Moores didn’t receive dividends or “income” from their ownership stake in a foreign company, so they assert that only realized income can be taxed under the 16th Amendment to the U.S. Constitution. The Supreme Court’s decision to consider the constitutionality of taxes on unrealized gains will galvanize longstanding debate over Congress’ power to tax wealth and likely have landmark ramifications for wealth taxes going forward. The key sticking point is whether income must be realized to be taxable under the Constitution. Groups including the Cato Institute argue an income tax can be imposed only on realized income, and if that weren’t the rule, Congress’ power to tax would essentially be unlimited. The Supreme Court won’t hear the Moores’ case until its next term, which begins in the fall. Source Kiplinger

How Corporate America is Deploying AI: Technology stocks are having a bumper year. The main reason for the surge is the promise of artificial intelligence (AI). Corporate bosses are at pains to demonstrate how they are adopting ai. To get a broader sense of which companies and industries are adopting ai The Economist examined data on all the firms in the S&P 500. The Economist looked at five measures: the share of issued patents that mention AI; venture-capital (vc) activity targeting AI firms; acquisitions of AI firms; job listings citing AI; and mentions of the technology on earnings calls. The results show that even beyond tech firms the interest in AI is widespread and growing fast. Moreover, clear leaders and laggards are already emerging. Ranking all the companies using each metric and then taking an average produces a simple scoring system. Those at the top seem to be winning over investors. Since the start of the year, the median share price of the top 100 has risen by +11% while for the lowest-scoring quintile it has not moved at all. The top spots are unsurprisingly dominated by Silicon Valley. Almost 50 of them make the top 100. Nvidia is the highest-scoring firm. Beyond tech, two types of firms seem to be adopting ai the quickest. One is data-intensive industries, such as insurers, financial-services firms and health-care providers. They account for about a quarter of the top 100. A second group is industries that are already being disrupted by technology, including carmakers, telecoms, media, and retail. Thirteen firms from these industries make the high-scoring 100, including Ford, GM, and Tesla Source The Economist

The Harsh Reality of Pickleballing: Over +36 million Americans played the sport at least once in 2022, and this week, UBS estimated pickleball will continue to grow by +150% in 2023. While the sport has served as an important social and physical activity outlet for seniors, it may also be contributing to more injury-related health care costs. In an analysis released this week, UBS estimates that the cost of pickleball-related injuries in 2023 will climb to $377 million. Using injury-related studies about the sport, the company estimates the number of healthcare visits due to pickleball in 2023 will be around 67,000 ER visits, 366,000 outpatient visits, 8,800 outpatient surgeries, 4,700 hospitalizations, and 20,000 post-acute episodes. The analysis also estimates about one-third of all “core” picklers or those who play at least eight times a year, are seniors, and that pickleball players tend to be richer, with an estimated half making more than six figures. Source Fortune

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