Commentary |
Wall Street has all eyes on the May jobs report this morning with most expecting a gain of around +188,000 jobs with the unemployment rate holding steady at 3.9%.
Most also expect wage gains to remain unchanged at +3.9% year-over-year. The biggest downside risks for bulls would be if job gains jump back above the +200k level or worse, if hourly wages spike. At the same time, a significant drop in job gains (sub-100K) or a spike in the unemployment rate will likely fan flames about trouble ahead for the economy.
Consumer Credit is also due out today and is something investors have been following a little more closely amid signs of that consumer spending may be slowing. Americans have spent down most of their Covid-era savings and are now racking up more debt to maintain the same spending patterns, which is something that could exacerbate any potential economic downturn.
Turning to next week, the main event will be the Federal Reserve’s two-day policy meeting on Tuesday-Wednesday. The policy decision on Wednesday, which is expected to make no changes, will be accompanied by updated Fed economic projections, including the so-called “dot plot” that maps out where officials expect the Fed’s benchmark rate to be in the short, mid, and long term.
Officials in March maintained their outlook for three 25 basis point rate cuts in 2024 which was a bit of a bullish surprise after inflation stalled in the first part of the year. However, since the March meeting, several Fed officials have cautioned that inflation may not be cooling fast enough to justify cutting rates as much as anticipated. Some have even questioned whether it will be possible to trim at all.
While recent data indicates that “disinflation” has resumed, it might not be enough to sway the more hawkish members. Most on Wall Street are now only penciling two rate cuts this year.
Also due out next Wednesday is the highly anticipated Consumer Price Index (CPI) for May. A sizable slowdown in both headline and “core” (strips out food and energy) CPI in April was key to restoring Wall Street’s confidence that interest rates would move lower by the end of the year. Meaning if CPI rebounds, it could get ugly for the bulls.
Other data next week includes the NFIB Small Business Optimism Index on Tuesday; the Producer Price Index (PPI) on Thursday; and Consumer Sentiment and Import/Export Prices on Friday.
Earnings next week are pretty light with just Casey’s General Store, GameStop, and Oracle on Tuesday; Broadcom and Dave & Buster’s on Wednesday; and Adobe on Thursday.
Unemployment Rate Sub-4% Longest Streak Since 1950's: Today's official U.S. jobs report may set a new milestone if the May unemployment rate matches consensus expectations of 3.9%. That's because it would mark the longest stretch of sub-4% unemployment since the early 1950s, according to Deutsche Bank's Jim Reid. "At the moment, the current run of sub-4% unemployment is at 27 months, a joint record with the late-1960s," Reid wrote in a note. The current stretch began a little over two years ago and has been going for 27 straight months. The 1950s stretch lasted for 35 consecutive months.
Everything Is Not Going to Be OK’ in Private Equity: The private equity industry must face up to the reality of lower valuations, according to Apollo Global Management Inc.’s Co-President, Scott Kleinman. “I’m here to tell you everything is not going to be ok,” the Apollo co-president said in a session at the SuperReturn International conference in Berlin this week. Private equity firms didn’t take significant markdowns during the recent period of rapid rate hikes which means that “investors of all sorts are going to have swallow the lump moving through the system,” he said, referring to assets that private equity firms bought up until 2022. Funds are now holding on to these companies and will eventually have to refinance at higher rates. New York-based Apollo is one of the world’s largest alternative asset managers, investing across credit, equity and real estate. The firm, which ended last year with $651 billion of assets under management, is targeting $1 trillion by 2026. Source Bloomberg
US Oil and Gas Companies Have Been on a Consolidation Tear: Last year, crude oil and natural gas exploration and production companies increased spending on mergers and acquisitions to $234 billion, the biggest amount adjusted for inflation since 2012, according to data from the Energy Information Administration. The latest tie-up, announced on Wednesday, involves Houston-based ConocoPhillips and Marathon Oil in a deal valued at $22.5 billion, including debt. They're all the same underpinnings. It's buying acreage, it's buying inventory, Matt Willer, managing director of capital markets and partner at Phoenix Capital, told Yahoo Finance. He added, now recognizing that oil and gas isn't going anywhere likely during our lifetime, the oil producers have to make up for lost time. Willer says the wave of mergers and acquisitions in the energy space comes after more than a decade of underinvestment amid political and regulatory uncertainty over the oil and gas landscape as the US transitions to green energies. Source YahooFinance
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US to Open Broad Antitrust Probe Into AI Giants: U.S. regulators are moving ahead with antitrust investigations into the roles that Microsoft, OpenAI, and Nvidia play in the artificial intelligence industry, per a source familiar with the matter. The broad probe shows the intensifying scrutiny of AI and regulators' concern of the technology's concentration within some of the largest companies in the world. The Justice Department will investigate whether AI chipmaker Nvidia's conduct has violated antitrust laws, the source said. The FTC will examine OpenAI and Microsoft's conduct in regard to their AI partnership. The FTC has already opened other investigations into companies using AI. The agency said in January that it launched a probe into Alphabet/Google, Microsoft, Amazon, OpenAI and Anthropic to seek anticompetitive behavior into its partnerships and investments. Source Axios
Walmart Adds Bonus for Hourly Employees: Walmart is adding a new bonus for hourly store workers months after hiking store managers' pay and redesigning the bonus program for managers. The nation's largest private employer and largest retailer is looking for more ways to retain employees in the competitive labor market. Walmart U.S. CEO John Furner said on a call with reporters that about 700,000 employees will be eligible for annual bonuses up to $1,000. The program recognizes performance and years with the company, Furner said. "Everything's better when turnover goes down and tenure goes up," Furner said. "We're really pleased that our turnover has gone down over the last year." He said the average U.S. wage is about $18 an hour and Walmart has increased base wages about 30% over the last five years. Source Axios
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