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Stock indexes are higher ahead of the US Federal Reserve’s policy decision today. The policy statement is scheduled for release at 1:00 p.m. CST and will be followed by a press conference from Chair, Jerome Powell at 1:30. The central bank is widely expected to leave its benchmark rate "unchanged" in a range between 5.25%-5.50%.
Of greater interest to investors is the Fed’s outlook for interest rates, aka the so-called “dot plot,” which has not been updated since December. At that time, the median Fed official forecast for where rates would be at the end of 2024 was equivalent to a range of 4.50%-4.75%, indicating three -25 basis point rate cuts.
The risk to bulls is that a couple of Fed officials decide to walk back their outlooks, shifting the median projection to just two rate cuts in 2024, versus the three that most on Wall Street are still anticipating. Of course there is always a possibility that things shift the other direction and the dot plot indicates four -25 point trims, though I’ve not seen a single economist make this call.
Even if the median outlook remains unchanged, investors are anxious to see how individual forecasts might have moved. Bulls are hoping to see less of a divide, ideally with some of the more “hawkish” year-end outlooks being trimmed. This would indicate that officials are getting more on the same page, something that tends to happen just ahead of major policy moves.
The big debate among officials is whether inflation or interest rates are the bigger threat to the economy. The “hawks” are afraid that inflation is still at risk of reigniting if the Fed cuts rates while the “doves” are worried that an extended period of tight financial conditions risks strangling the economy.
Investors will also try to glean further insights from Fed Chair Powell during his press conference.
Remember, Wall Street is sensitive to not only what Powell says but how he delivers it. If he’s more focused on the positives, such as how far inflation has fallen, and repeats his previous comments that the Fed is “close” to cutting rates, bulls will take it as a positive sign. If his comments are short and he hammers home that inflation is “not there yet,” it will likely cast more doubts on rate cut prospects.
Beyond the Fed today, investors are anxious to see earnings from Micron Technology, which just recently started mass production of its high-bandwidth memory semiconductors for use in Nvidia's latest AI chip.
Other earnings of note include BioNTech, General Mills, and Prudential. There is no economic data of note.
In Washington, Congressional leaders appear to have clinched a deal to fund the rest of the government and avoid a shutdown this weekend. However, the funding bill still needs to pass both the full House and Senate, so the shutdown threat could still be very much alive.
As for today, it's all about the Fed and what Jerome Powell has to say in the press conference. It feels to me like energy and housing inflation is going to stay stickier than many were thinking.
At the same time, real interest rates have stayed elevated which is something I warned and talked about months ago. Even thought the Fed might start cutting real rates might be more stubborn. Keep in mind the 10-year yield is back close to its highs on the year at over 4.3% and the 30-year mortgage is back above 7.5%. So it will be interesting to see how the long-end of the curve responds following the Fed's comments.
As for the stock market, bears are thinking the Fed could take back one it's proposed three (-25 point) rates cuts in 2024. If the Fed adjusts the dot-plot to show two (-25 point cuts) instead of three, the argument is bulls may pause for a moment to try and figure out why...
Interesting... A Boom for the Tire Business! The business of tires has historically been marked by tight competition, low growth and slow margins. The total market value has remained around $50 billion in the past few years, and the overall market grows at a rate of about 2% per year, according to consultancy AlixPartners. But electric vehicles are presenting a whole new set of opportunities. With their heavy weight and quick acceleration, EVs tend to burn through tires about 20% faster than internal combustion vehicles do, according to AlixPartners. And the tires cost about 50% more. Other technical challenges include dampening tire noise, which is a lot more noticeable in the cabin of an otherwise silent EV, and improving an EV’s range. Michelin research shows tire selection can impact an EV’s range by 10% to 15%. The extent to which tire companies are able to distinguish themselves as innovators in these areas could determine whether, or how often, customers ask for their products by name. Source CNBC
Record Number of Wealthy Americans Looking for Ways to Live Overseas: An investment-migration consultancy says that it's seeing record numbers of wealthy Americans looking for ways to get residence rights abroad or additional citizenships. Mehdi Kadiri, the head of North America at Henley & Partners, said in the company's 2024 USA Wealth Report that in 2023 it saw more Americans inquire about residence and citizenship by investment than in any other year. The most popular route for Henley & Partners' US clients is the Portugal Golden Residence Permit Program, a residence-by-investment program for non-European Union nationals, known as a golden visa. It allows investors to live and work in Portugal and have visa-free travel within the EU-wide Schengen Area if they transfer at least 500,000 euros, or about $542,000, to qualifying investment funds. Programs offered by Malta, Spain, Greece, and Italy are also high on American citizens' lists, Henley & Partners said. The programs allow wealthy Americans to live in the US as their primary residence but relocate "at any point," it said in the report. Henley & Partners said that reasons Americans were seeking migration through investment included mitigating political risk, getting a safety net amid international conflicts, creating business opportunities abroad, and reducing taxes. Source Business Insider
What Unilever Ditching Ice Cream Reveals About US Consumers: After more than 100 years of selling ice cream, Ben & Jerry’s owner Unilever has lost its taste for the business. Unilever said Tuesday it plans to separate its ice-cream division—which also makes Magnum, Wall’s, Breyers, Talenti, Popsicle and Klondike—into a stand-alone business. The company—whose stable of brands includes Dove soap, Hellmann’s mayonnaise and Tre Semme shampoo—also said some 7,500 jobs would be affected as part of a restructuring program aimed at saving about $870 million, over the next three years. Unilever has sold ice cream since it bought Wall’s in 1922, a brand that was started by a butcher’s shop in London as a way to offset weaker meat sales in the summer months. But the ice-cream business has in recent years posed big challenges to Unilever. Ben & Jerry’s, once regarded by analysts as a jewel in Unilever’s crown, and its parent company have repeatedly butted heads. The financial performance of the ice-cream business has also been sluggish. Last year, ice-cream sales rose +2.3%, the weakest growth rate of any unit in Unilever’s portfolio. The company raised prices to offset higher input costs, resulting in a drop in the amount people bought. The increasing popularity of weight-loss drugs like Ozempic and Zepbound is also adding a new uncertainty about future demand for ice cream. Last month, Morgan Stanley cited data showing that ice cream was among the categories for which users of weight-loss drugs cut back spending the most. Source WSJ
Real Estate Pain Is Showing Up in an Obscure Investment Product: An obscure investment product used to finance risky real estate projects is facing unprecedented stress as borrowers struggle to repay loans tied to commercial property ventures. Known as commercial real estate collateralized loan obligations, or CRE CLOs, they bundle debt that would usually be seen as too speculative for conventional mortgage-backed securities into bonds of varying risk and return. In just the last seven months the share of troubled assets held by these niche products has surged four-fold, by one measure, to more than 7.4%. For the hardest hit, delinquency rates are in the double digits. That’s left major players in the $80 billion market rushing to rework loans, while short sellers are ramping up attacks on publicly-traded issuers they say may be so beset by missed payments that they have little to no equity value. The pain is part of a broader shakeout in the $20 trillion US commercial real estate market but industry observers say few products are more exposed than CRE CLOs. That’s because they’re primarily stuffed full of short-term, floating-rate loans for properties undergoing renovations or expansions, the type of risky debt that banks or CMBS often don’t want to hold. Some say the pain could eventually spread to those invested in less risky portions, too. Source Bloomberg
BOJ Hike Marks End of Negative Rate Era: Global central bankers, desperate to jolt post-financial crisis economies out of a stagnant state and stoke inflation, embarked on a grand experiment in the 2010s — pushing interest rates into negative territory. Now, that experiment is officially over. Japan ended its negative interest rate policy yesterday, the last nation to exit from once-unthinkable strategies meant to address an economy trapped by sluggish growth and deflationary conditions. The 2020s, however, have so far looked much different for central bankers, with inflation rather than deflation the dominant risk — leaving little reason to continue such unconventional policy. Even apart from changing economic conditions, the legacy of NIRP is decidedly mixed, so central banks may be reluctant to return to sub-zero rates. The stimulative benefits were ambiguous, while the popular discontent it engendered — savers don't want to have to pay the bank to deposit money, after all — was significant. And it was costly for banks. Source Axios
This Chart Illustrates Why Inflation Hurt So Bad: Inflation is a term that means very different things depending on whether you're talking to an economist or just a normal American. If you look at the prices that are top of mind for regular folks, inflation turns out to have been astonishingly high in mid-2022 — far higher than the headline Consumer Price Index. Now, however, it's at a very benign 2%. Axios took the three most salient prices in the U.S. economy — gasoline, food at home (i.e. groceries), and rent - and charted how they've changed since 2017. The resulting gas-food-lodging inflation chart spiked to an astonishing 18% in June 2022, and then briefly turned negative a year later as gas prices came down fast. The peak in gas-food-lodging inflation was double the 9% peak in headline CPI. This time last year, it was still above 7%, but since then it's been much lower. The series is volatile, but since mid-2023 it has hovered at decidedly unworrying levels. In February it came in at a benign 2% Source Axios
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