Bulls believe that the slowdown could provide the Fed cover to pause its rate hiking campaign, particularly in the wake of this week's banking crisis. Many on Wall Street are also pointing out that the banking collapses have led to a dramatic tightening of credit as banks raise lending standards. That will in turn reduce the amount of money in the system, effectively accomplishing something that the Fed's actions have so far mostly failed to do.
Bulls see the Fed either pausing rate hikes at its meeting next week on March 21-22 or only lifting rates by 25 basis-points and signaling a pause starting with the May 2-3 meeting (no Fed policy meeting in April). Bears, however, argue that the bank crisis is limited and, thanks to the Fed's own plans to restore depositor funds and shore up other institutions, it won't have a wider impact on financial stability. What's more, bears point out that the trouble in the banking sector is a liquidity issue - not higher interest rates - and the Fed has separate tools to manage those risks. And with inflation still 3x the Fed's target rate of +2%, bears believe the Fed has no choice but to continue its rate hiking campaign.
Ahead of the Fed's meeting next week, investors are anxious to see the latest policy moves by the European Central Bank (ECB) which will be announced tomorrow (Thursday). ECB officials have been very vocal in their support of a 50 basis-point hike but following the US bank troubles and worries that those risks could spread, some expect the bank may deliver a smaller increase and possibly signal a less aggressive approach going forward.
Such a move would be seen by the bulls as further justification for the US Fed to adopt a more dovish stance and further boost hopes that the end of its hiking campaign is near.
Today, investors will be digesting the Producer Price Index (PPI) for February which is expected to slow pretty dramatically. Consensus is looking for a monthly rise of around +0.3% versus +0.7% in January, which would pull the year-over-year rate down to +5.4% from +6% previously.
Retail Sales will also be closely inspected today following the surprisingly strong +3.0% surge in January, the largest monthly gain in nearly two years. Economists are forecasting an outright decline of -0.3% for February.
Other data today includes Empire State Manufacturing, Business Inventories, and the Housing Market Index.
Today's earnings highlights are Adobe and Prudential. On the international front, some are concerned about rising tensions between the US and Russia after a US spy drone was knocked out of the sky by a Russian jet over the Black Sea yesterday.
According to experts, this is the first direct military confrontation between the two countries since Russia invaded Ukraine. US officials have called the incident "irresponsible" and "juvenile" but the Pentagon says it was nonetheless an accident. Still, it highlights the risks of accidental military engagement as the two countries continue to operate in close proximity to one another in the Black Sea area. Russia has spun the incident as an intended provocation by the US, saying the drone flew into Crimea airspace that Russia annexed in 2014. Russia also claims their jets didn't interact with the drone and that it crashed due to "sharp maneuvering."
More Companies Are Going Bust This Year—and It’s Not Just Banks: The collapses of Silicon Valley Bank and Signature Bank over the weekend continue to dominate headlines and send ripples through markets. But even before the pair of bank failures, 2023 was on track for a nasty year for corporate defaults across the globe. According to S&P Global Ratings, 23 companies defaulted in the first two months of the year, including 15 in February alone. That’s the highest year-to-date total since 2009, during the depths of the global financial crisis. “Nearly three-quarters of February defaults came from U.S.-based issuers, and U.S. corporate defaults this year are already over 2.5x higher than the year-to-date 2022 total,” wrote S&P Global Ratings’ Nicole Serino on Monday. Year to date, the most defaults have been in the retail and media and entertainment industries. Source Barrons
ChatGPT Maker OpenAI Unveils NEW Model GPT-4: OpenAI has released GPT-4, its latest artificial intelligence model that it claims exhibits “human-level performance” on several academic and professional benchmarks such as the US bar exam, advanced placement tests and the SAT school exams. The new model, which can be accessed via the $20 paid version of ChatGPT, is multimodal, which means it can accept input in both text and image form. It can then parse and respond to these queries using text. According to OpenAI, GPT-4 is its “most advanced system yet”. It claims it is more reliable and able to handle nuanced queries far better than its predecessor. For instance, GPT-4 scored in the 90th percentile on the Uniform Bar Exam taken by would-be lawyers in the US compared to ChatGPT, which only reached the 10th percentile. Source Financial Time
Airlines Are Optimistic About Travel Demand: Executives from major U.S. airlines on Tuesday said they were optimistic about travel demand for the rest of the year, shaking off worries about creeping operating costs and fears of ebbing demand. Airlines have been dogged by worries that demand will falter amid higher fares, and that rising costs of fuel and labor would dent profits. Consumers’ habits are settling into postpandemic patterns, but executives say demand is still strong from leisure travelers and those mixing business with vacation, known as “bleisure.” United Airlines said it is now seeing lower troughs in traditionally slower months, such as January and February, and stronger growth in busier months. Gains in traditional corporate travel demand have leveled off somewhat. It remains about 80% recovered, Delta Air Lines Chief Executive Ed Bastian said at JPMorgan Chase & Co.’s investor conference yesterday. Executives said some routes that were once frequented by road warriors have less demand as some types of corporate travel, including one-day trips for meetings, have dropped off. Airline executives have said that factors like the time needed to hire and train pilots, air-traffic control constraints, and delayed aircraft deliveries are likely to limit their growth this year—helping to prop up fares. Source WSJ
Legal Sports Betting Totals by State: In 2022, sports betting was live in 31 states plus Washington, D.C. Betting activity is highly concentrated, with the top five states (New York, New Jersey, Illinois, Nevada, and Pennsylvania) accounting for 57% of the total reported legal wagers. New York State had the most legal sports betting, largely because it was the most populous state to allow online sports wagers so far. Notably, 1.2 million accounts were created in the first 10 days of legalization. Second-spot New Jersey, which challenged the federal ban against legal sports betting and won in 2018, has since rapidly established itself as a sports betting hub. Illinois had the third highest annual total, and beat its prior state record with $1 billion in wagers in October alone. One key factor was a change to the registration process in 2022, which allowed residents to sign up online rather than in-person at a casino. Notably, the most populous states of California, Texas, and Florida do not yet have legal and/or operational sports betting. Together, the three states represent 27% of the total U.S. population. Sports betting was initially legal in Florida but has been paused due to ongoing legal proceedings.
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US Senators Seek to Expand Sales of Ethanol With Support From Big Oil: U.S. senators reintroduced a bipartisan bill on Tuesday that would allow nationwide sales of gasoline with a higher blend of ethanol year-round, with the support of a leading oil trade group. Republican Senator Deb Fischer from Nebraska and Democratic Senator Amy Klobuchar from Minnesota argue that the expanded sales of E15, or fuel containing 15% ethanol, would decrease gasoline prices and reduce U.S. dependence on foreign oil. Year-round sales of E15 have been long sought by the biofuel industry and corn farmers, who would benefit from the increased market. The American Petroleum Institute (API), one of the largest U.S. oil trade groups, supported the bill when it was introduced last autumn. Efforts by Midwestern governors to lift restrictions on E15 in their states have raised oil industry concerns that the proposal would create a patchwork of different fuel regulations and logistical challenges around distribution. Source Reuters
Ohio Sues Norfolk Southern Over "Entirely Avoidable" Train Derailment: Ohio is suing Norfolk Southern over last month's East Palestine train derailment, calling it "entirely avoidable," state Attorney General Dave Yost announced Tuesday. The 58-count civil lawsuit filed in federal court seeks to hold one of the country's largest freight rail operators financially responsible for the Feb. 3 train derailment that caused the release of over 1 million gallons of hazardous chemicals into the surrounding environment. The controlled release "recklessly" endangered the health of residents and Ohio’s natural resources, Yost alleges in the complaint. The lawsuit claims that dozens of violations of various federal and state environmental laws resulted in hazardous pollutants being released into the air, water and ground — potentially posing long-term threats to human health and the environment. The state is seeking reimbursement for damages, incurred emergency response costs, repayment of court costs, as well as the recovery of lost taxes and other economic harm for the state and its residents. Source Axios
Meta to Lay Off 10,000 More Workers: Meta will lay off 10,000 more workers and incur restructuring costs ranging from $3 billion to $5 billion, the company announced Tuesday, with CEO Mark Zuckerberg warning economic instability could continue for “many years.” Zuckerberg said hat the Facebook parent plans to close 5,000 additional open roles that it hasn’t yet filled. In a nod to continued economic uncertainty, Zuckerberg noted that the company should prepare for “the possibility that this new economic reality will continue for many years.” In a SEC filing announcing the cuts, Meta also said it anticipated lowered total expenses in 2023, ranging from $86 billion to $92 billion. The new round of layoffs follows a previous round of cuts, announced in November, that affected more than 11,000 workers, which equated to roughly 13% of Meta’s overall staff. Source CNBC
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