Stock bulls have had several big risk factors essentially removed from the deck, including the threat of a US debt default and to this point a potential meltdown in the banking system. Bulls are now wanting to clear another major hurdle - the Federal Reserve's interest rate hikes - hoping they will soon be taken out of the equation, with most anticipating the central bank to pause the program at its meeting next Tuesday-Wednesday, June 13-14.
The Fed has increased its benchmark rate by a whopping +500 basis points since March of last year from near-zero to the current 5.00%-5.25% range. That's the fastest pace of interest rate increases in the Fed's history and multiple officials have said that a "pause" is appropriate at this point in order to avoid the risk of over-tightening.
Officials have also been reiterating over the last few weeks that even if the Fed does pause at next week's policy meeting, rate hikes could resume in July, depending on the data. In fact, traders currently place the odds of a +25 basis-point hike in July at just over +50%, which would push the Fed's benchmark rate to 5.25%-5.50%.
Hardly anyone sees rates going up by more than +25 basis points from here, though. The trade is pretty evenly divided over where we end the year, with the odds around 34% that we get an interest rate cut by yearend.
One of Fed's preferred inflation gauges, the "core" PCE Prices Index, peaked at +5.0% in June 2022 and has since slowly come down to +4.7% in the April 2023 read. The data shows the bulk of inflation is coming from the "services sector", which was up by an annual rate of +5.5% in April, versus goods inflation of +2.1%.
There are signs that services prices are starting to deflate, though. The Prices Paid component of the May ISM Non-Manufacturing Index yesterday dipped by more than -3 full percentage points. That follows a monthly decline in Manufacturing Prices of -9 percentage points. Both are encouraging signs that inflation should continue to slow from here.
The next key inflation read, the May Consumer Price Index (CPI), is due out next Tuesday, just as the Fed begins its policy meeting. Bears are worried that even though inflation may be slowing, data shows US credit card spending continues to increase and the US consumer might be running out of purchasing power, which will eventually slow overall demand and negatively impact corporate profits. Money supply is certainly shrinking, the question is will it shrink to the point it cuts off a major portion of consumer demand?
Big Banks Could Face +20% Boost to Capital Requirements: U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year. The changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average, people familiar with the plans said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses. Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases. Capital is the buffer banks are required to hold to absorb potential losses. The plan to ratchet up capital is expected to be the first of several steps to beef up rules for Wall Street. The industry says more stringent requirements aren’t needed, could force more banks to merge to stay competitive and could make it harder for Americans to get loans from banks. Institutions with at least $100 billion in assets might have to comply, effectively lowering an existing $250 billion threshold for which regulators have reserved their toughest rules. Source WSJ
Hotel Developers Run Out of Cash as Construction Lending Tightens: Tighter lending standards from regional banks are making it harder for U.S. hotel developers to secure funding, slowing construction of new hotels at a time Americans' appetite for travel is ripe. Hotel developers, private equity firms, and general contractors told Reuters the financial stress on regional banks -- the largest lenders to hotels and other commercial real estate markets -- has forced developers to postpone projects or find other creative ways to raise capital. The hotel industry's predicament highlights the impact on the broader U.S. economy of the regional banking crisis, which resulted in the failure of three mid-sized U.S. lenders and prompted a flight in deposits to larger banks. Since March, 59 of the 98 total U.S. hotel projects that broke ground or were in the pre-construction phase this year have been paused, according to Build Central Inc., a subscription-based research and analytics firm used by some large hotel brands to gauge market opportunities by location. Analysts say slower hotel development will also limit profits of blue-chip manufacturers like Caterpillar Inc. , whose commercial real estate customers account for around 75% of construction sales. Source Reuters
Higher Airfares, Higher Profits: Soaring ticket prices are lining the pockets of the world’s biggest airlines, providing balm to the economic wounds suffered during the travel lockdowns of Covid-19. Flying will be far more expensive this summer, according to corporate travel manager American Express Global Business Travel, which analyzed tens of thousands of client transactions on international flights to and from Asian destinations. A typical New York-to-Hong Kong flight in economy class cost more than twice as much this year as in 2019, and almost a third more than last year. Fares have been bolstered by tight capacity going into travel’s peak season and customers are eager to book, often upgrading to more expensive tickets. Airline profits may hit $10 billion this year, more than double a December estimate, the IATA said. Some 4.35 billion people are expected to travel in 2023, which is closing in on the 4.54 billion who flew in 2019. Total revenues are expected to grow +9.7% year over year to $803 billion. This is the first time that industry revenues will top the $800 billion mark since 2019 ($838 billion). Source Bloomberg
Tyson Lays Off Workers Who Opt Against Relocation: Tyson Foods will cut the jobs of more than 200 staff who have opted not to relocate from South Dakota to the company’s headquarters in Arkansas. The company’s sites in Dakota Dunes and Arkansas are 383 miles (616 km) away from each other and some 262 workers have decided not to transfer. Reuters reported the Dakota Dunes office has about 500 employees, so only just over half have moved to relocate. “When we announced the move to our corporate office in Arkansas, our goal was to make the proposition of relocating as attractive and easy as possible while understanding that some may not be able to make the move,” the company in a statement. Tyson announced in October it had decided to shut three corporate sites, including the Dakota Dunes location, and have a single office in Springdale in Arkansas. The three sites had approximately 1,000 employees combined Source Just Food
Apple Moves to Its Own Silicon, Unveils $3,500 Headset: Apple said its $7,000 Mac Pro computer will contain the new M2 Ultra chip, which offers performance advantages over previous models featuring an Intel processor. The M2 Ultra, which will power the new computer, is up to three times faster than the speediest Intel-based Mac Pro. At Apple’s Worldwide Developer Conference (WWDC) on Monday, Jennifer Munn, director of engineering program management, called the M2 Ultra “a monster of a chip.” Apple launched its initial computer chip, the M1, in 2020. The Mac Pro containing the new chip will come with 192 GB of memory, Apple said. The computer will start at $6,999. Apple had about 9% market share of global PC shipments in the first quarter, technology industry researcher Gartner said in April. But the PC industry has been shrinking, with total shipments falling 30% year over year. Apple’s Mac revenue in the latest quarter fell 31% to $7.17 billion. Apple yesterday also announced its "Vision Pro AR Headset," the company's first new major product since 2014. Source TechCrunch
A Lifeline for Property Is All Gummed Up: Loans for the property industry are drying up fast. The CBRE Lending Momentum Index, a proxy for U.S. commercial real estate lending, fell 54% in the first quarter of 2023 compared with a year ago. Banks, which usually issue around half of all commercial real-estate loans in the U.S., are stepping back until it is clear where real-estate values will settle. Alternative lenders would love to fill in some of the gaps. “When the market is dislocated, it is often the best time to invest,” says Harbor Group International President Richard Litton, whose firm recently raised $1.6 billion for a debt fund focused on financing apartments. Real estate debt funds made good returns in the years after the 2008 global financial crisis, which was the last time the banks took a step back from property lending. But the high rates that alternative lenders now charge make their loans unappealing to most borrowers. A floating rate bridge loan for a multifamily apartment block from a debt fund will cost 8% to 10% today. Property buyers would need to find buildings at a very low price to justify taking on such an expensive loan. Source WSJ
Millions of Americans Struggling with Childcare Costs: The pain also varies widely depending on where you live, but there is one near-universal truth about the cost of childcare: It's too high. The US Department of Health and Human Services considers childcare "affordable" if it costs less than 7% of a family's income. But nearly two-thirds of parents spend far more than that. And only 2% of counties in a recent analysis fell within this limit, meaning that by the government's definition, childcare is unaffordable in 98% of counties across the country. While costs have been growing for decades, the pandemic brought new challenges that made the crisis even worse. For one, many daycare workers were pushed out of the industry — approximately 100,000 workers decided to move on to other industries over the past three years. As a result, many childcare centers shut down and left parents in childcare deserts with few other options. Many of these parents are forced to turn to in-home childcare, which costs nearly $36,000 a year on average, 39% more than the average cost of a childcare center. Three of the five most expensive counties for childcare in America by share of income are found in New York City. On a state level, Massachusetts takes the cake for the highest total amount spent on care per child. Out-of-home childcare for infant care in the Bay State costs $20,913 annually. On the other side of the spectrum is Mississippi, which has the most affordable childcare of any state, at just $5,436 per child annually. Source Insider
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