All three major indexes made gains last week, which was the sixth-straight week that the Nasdaq moved higher, its longest winning streak since 2020. The Nasdaq is now up more than +26% for the year, while the S&P 500 is up +11.5% and the Dow is up almost +2%. The week ahead won't provide much in the way of "new" data with a very light economic report schedule and only a handful of earnings results on the calendar.
Debate about the Federal Reserve's next moves will no doubt be at the forefront again, particularly after a very strong May jobs report released on Friday. Employers added +339,000 jobs for the month, far ahead of expectations for a gain of around +190,000. At the same time, hourly earnings rose less than expected and the unemployment rate jumped to 3.7% from +3.4% previously.
Bulls mostly interpret the report as a sign that the labor market is moving into balance thanks to the slowdown in wage growth and underlying data that indicates the labor market is not nearly as tight as the headline numbers suggest. Hourly wage gains now stand at an annual rate of +4.3% versus +4.4% in April, which is not a big decline but it's still a move in the right direction.
Fed officials have consistently singled out wage gains as a particularly problematic area that is keeping inflation elevated. Most economists believe wage growth needs to be closer to 3.5% or lower in order to avoid fanning inflation. However, a lot of bulls are now arguing that the rapid adoption of artificial intelligence by corporate America will bring about a rapid increase in productivity, which should in turn boost company profits while also working as a "disinflationary" force.
Bears aren't so sure this effect will play out as soon as bulls expect, and certainly not fast enough to see the Fed cutting rates anytime this year. Bears also continue to worry about the concentration in tech that's resulted from the AI buzz and which has been a driving force behind the Nasdaq's outsized gains this year.
Seasoned traders are mixed on this issue with some pointing to past instances where one sector leads and eventually lifts the rest of the market. Others see it as a potential disaster in the making if AI fails to deliver on its promise and/or investors start to lose interest.
Many bulls believe that the overarching bearish sentiment towards stocks is itself "bullish" especially considering that so much money is still sitting on the sidelines.
Keep in mind, fund managers that sat out this year's run higher are likely feeling more pressured to play catch up. Meaning more money could start flowing into stocks even if bears are reluctant to believe the rally will last.
Today, investors will be digesting the ISM Non-Manufacturing Index and April Factory Orders.
Bottom line, the latest US employment report tells the trade that the economy is still a long way from any type of major recession, but it does bring more debate and uncertainty about the Fed's next series of moves.
Will the Fed elect to hike rates again as US employment remains extremely strong and could continue to keep inflation elevated? The trade currently has the odds at about 75% that the Fed leaves rates "unchanged" at next week's meeting.
They have about 25% odds of another small quarter-point rate hike in June.
Interestingly, however, the trade is giving +50% odds of a quarter-point rate hike at the Fed's July meeting. In other words, the market believes the Fed is going to "pause" at next week's meeting as it could help the overall environment but more than likely comes back with another small rate hike in July, especially if the employment data stays strong.
Saudi's Cutting 1 Million Barrels Per Day of Oil Production... What About Gas Prices? Saudi Arabia said Sunday it would cut 1 million barrels of oil a day as part of a deal between OPEC and its allies after one of the most contentious production meetings in recent years amid concerns over slowing global energy demand. The Saudi announcement came soon after OPEC and its Russia-led allies said the group had agreed to stick to current production targets until the end of the year. This doesn't necessarily mean crude oil prices will be heading higher. If you remember, brent crude, the international oil benchmark, is down about -20% since OPEC+ first jolted the market in October by slashing output by -2 million barrels a day. In April, some of the group’s largest members, including Saudi Arabia and Russia, cut a further -1.6 million barrels a day. Source WSJ
NEW Report Shows Worst Lay-Off Numbers Since 2009... “Artificial Intelligence” Cited as One Reason: Overall, planned layoffs reached about 417,500 jobs in May, more than four times the job cuts during the same period last year. And while the maker of the report, Challenger, Gray & Christmas Inc., has long included tables that lay out the top reasons for announced job cuts, this appears to be the first time that “Artificial Intelligence” has been included, with some 3,900 jobs apparently lost to the proverbial robots last month. The firm found that between January and May, there were about 417,500 lost jobs, making it the worst five-month start to a year since 2020, when the onset of the pandemic led to more than 1.4 million layoffs. Outside of the pandemic, the start of 2023 has produced the worst layoff numbers since the 820,000 layoffs that took place to start in 2009, per the Challenger report. While Challenger expects the trend to continue, the spokesperson said some companies could be hesitant to reveal AI as a motivating factor for layoffs, and it's unclear how the number of jobs created by AI will compare to the number of jobs that are eliminated because of it. Source Bloomberg
Palo Alto Networks Replaces DISH Network on S&P 500: Palo Alto Networks, ticker symbol PANW, will replace DISH Network) in the S&P 500 prior to the opening of trading tomorrow, June 20th. Palo Alto Networks, is a global cybersecurity leader, continually delivering innovations that enable secure digital transformation. Palo Alto Networks, which recently reported earnings and sees AI transforming the software industry over the next 12 months, has seen its shares rally +55.7% year to date, resulting in a market cap of $66.44 billion. The S&P 500 has gained +11.5% on the year. DISH shares have fallen -48% this year, resulting in a market cap of $3.89 billion.
US Infrastructure Receives a "C-”, Will More Money Make a Difference? President Biden signed the US Infrastructure Investment and Jobs Act into law back in November 2021. Since then, the legislation has provided state and federal agencies with +$1.2 trillion in funding to refurbish roads and bridges, improve access to clean water and internet connectivity, and increase the number of clean energy projects. A total of seven federal agencies received funding through the infrastructure bill, with the Department of Transportation getting the highest amount at $284 billion for modernizing roads, bridges, railways, and transit. Out of the $284 billion, $110 billion went toward roads and bridges. One in three bridges in the US is in need of repair or replacement, according to the American Road & Transportation Builders Association. Similarly, 43% of all roads in the country are in poor condition. A total of $73 billion is allocated for energy and power, $65 billion for broadband, and $55 billion for clean water. For energy and power, the bill will fund the national shift toward renewable energy, more electric vehicle charging stations, and improving natural gas infrastructure. The $65 billion for better internet access, an initiative known as the "Internet for All" bill, will be used to boost fiber optic cable manufacturing and provide high-speed internet to rural areas. The highest amount of funding for clean water went to Montana at $3 billion. Source YahooFinance.
Online Banks Are Winning the Deposit War: Online banks have managed to pull off what has become a tall order in 2023: They brought in more deposits than they lost. Deposits in the first quarter fell from December at regional-bank powerhouses such as U.S. Bank, Truist Financial and Citizens Financial. They were down more sharply at the smaller regional banks that have been under investor scrutiny, like Western Alliance and PacWest. But deposits were up quarter over quarter at Ally Financial and Goldman Sachs Group's online bank Marcus, which don’t have branch networks. Deposits were also up at Capital One, which has far fewer branches than the other big regionals. Online-focused banks can often offer higher rates, as they don’t have to pay for the real estate, employees or equipment required to run a traditional network of branches. Deposits at U.S. banks collectively fell by the most on record in the first quarter, according to Federal Deposit Insurance Corp. data. The shift toward online banks adds another layer to the debate over the value of branches. Customers have been increasingly relying on tech for routine transactions, especially since the Covid-19 pandemic. Banks closed roughly 6,100 branches between 2019 and 2022, according to FDIC data, bringing the total number to just under 71,200. That is the highest number of closures over a three-year period in history. Source WSJ
Inflation Fight Could Be Undermined by Panama Canal Drought: A severe drought has caused water levels in the Gatun Lake - which feeds the locks in the Panama Canal with the fresh water needed to raise vessels as they pass from the Pacific Ocean to the Atlantic - to drop far below normal. The result is weight limits and rising surcharges for vessels traversing the canal. It’s also unnerving economists and supply-chain experts. If Gatun Lake levels keep falling as forecast, the market reaction will be higher shipping rates and a scramble to find alternative routes from Asia to the US, logistics experts said. The drought also risks undermining the Fed's battle to get the rate of inflation closer to its 2% target, said Jonathan Ostry, an economics professor at Georgetown University and a former International Monetary Fund official. The Panama Canal Authority is forecasting a July 31 water level of 78.2 feet, beating the previous all-time low of 78.3 feet reached in May 2016 and far below the five-year average of 84.9 feet for July. Making matters worse, an El Niño system is building in the western Pacific Ocean. While this can cause heavy rainfall in some regions, in Panama it typically means severe drought and higher than normal temperatures. Cargo rates will rise on other routes, too, if low water levels force shippers to find alternatives—especially if the peak shipping months of August and September, when retailers build inventory ahead of the holiday shopping season, is stronger than expected. Source Bloomberg
"Shadow Banks" Hold Half of Global Assets: Risk-minded regulators, policy makers, and investors are warily eyeing the huge but nebulous world of largely unregulated nonbank financial intermediaries, known colloquially as "shadow banks," as a potential locus of future problems. It includes sovereign-wealth funds, insurers, pension funds, hedge funds, financial-technology firms, financial clearing houses, mutual funds, and fast-growing entities such as money-market funds and private credit funds. The nonbank financial system now controls $239 trillion, or almost half of the world’s financial assets, according to the Financial Stability Board. That’s up from 42% in 2008, and has doubled since the 2008-09 financial crisis. Postcrisis regulations helped shore up the nation’s biggest banks, but the restrictions that were imposed, coupled with years of ultralow interest rates, fueled the explosive growth of nonbank finance. Yet, no one seems to have a firm handle on the risks that nonbank financial entities could pose if numerous trades and investments sour. Nor is there a detailed understanding of the connections among nonbank entities, or their links to the regulated banking system. To date, this system hasn’t been tested, at this scale, for a wave of credit losses and defaults that could stem from higher rates and a weakening economy. Source Barrons
Tesla Says All New Model 3s Now Qualify for Full Tax Credit: All new Tesla Model 3 vehicles will now qualify for the full $7,500 federal EV tax credit, according to a change in Tesla’s website. The EV tax credits were mandated by Congress last August as part of the Inflation Reduction Act, with the goal of ending U.S. reliance on China for batteries. The full $7,500 tax credit is broken into two parts. EVs can qualify for half, or $3,750, if 50% of the value of battery components were produced or assembled in North America; the other half requires 40% of the value of critical materials be sourced from the U.S. or another free trade agreement country. On April 18, the department began enforcing the critical material sourcing requirement, which led to many vehicle models losing the full tax credits they had been eligible for in the first quarter of the year. Tesla’s Model 3 saw its full credit slashed in half, but many other automakers — like BMW, Rivian, Volvo and Hyundai — lost their credits entirely. Now, it appears that all Tesla vehicles will be eligible for the full $7,500 credit. Source TechCrunch
5 Trends That Will Change How You Invest: In the future we’ll be thirsty, and artificial intelligence will do our jobs, but we’ll all be svelte. These are some of the insights that Barron’s gleaned from investment specialists and financial advisors when we asked them about the economic, demographic, and technological changes that investors should brace for in the years to come. These include advances in biomedical science will alleviate a lot of human suffering related to rare genetic diseases and obesity. For instance, gene therapy, which involves transplanting normal genes into problem cells, may help address genetic disorders that cause approximately 7,000 diseases. Another major medical breakthrough that investors should watch closely: the advent of weight-loss drugs. On a broader scale, India is set to play a much bigger economic and geopolitical role in coming years. India’s population is also young: More than 40% of Indians are under age 25, a sharp contrast to China and many developed nations that are likely to find an aging population an economic drag in the future. Water scarcity is also among the critical issues investors may want to watch. Companies and people that don’t adapt are at risk. Investors should think about food and beverage companies, which are reliant on adequate water supplies. Agriculture is the elephant in the room but other industries are at risk, too. For example, semiconductor manufacturers use billions of gallons of water. Source Barrons
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