The recent bank failures have also lifted expectations for less aggressive monetary tightening ahead as the Federal Reserve kicks off its two-day FOMC meeting today.
Most on Wall street are anticipate a 25 basis-point hike. The bigger question is what the Fed has planned going forward. Meaning will the central bank signal a pause in the rate hiking campaign? Or will officials dig in their heels and maintain their aggressive inflation fight?
Most bulls argue that the Fed has gone too far too fast, hence the troubles in the banking sector. Bulls further believe that "real" inflation is much lower than current data reflects and the Fed runs the risk of causing permanent damage if they don't take a pause to let the data catch up. Bulls also believe the banking turmoil will do a lot of the heavy lifting for the Fed by reducing borrowing and investments, in turn cooling the economy and inflation.
Bears, however, still believe the Fed's inflation fight is far from over and that more pain and economic fallout lie ahead, particularly for sectors and businesses that are sensitive to interest rates. That could include a large number of companies, particularly "startups" that are reliant on funding to fuel growth and may now be trying to take off with too short of a runway.
Banks obviously face headwinds from the extraordinary devaluation of bond funds. How bad any resulting damage will ultimately be is also highly dependent on how long the Fed holds rates at higher levels. The longer they stay elevated, the harder it will be for companies to both raise money and service their debt. It also runs the risk of more banks running into liquidity problems, and even the larger institutions taking sizable hits to their profit margins.
Overall, higher rates for longer are not a recipe for corporate growth. While high inflation is not great for growth either, companies have so far managed to maintain or even grow profits in recent quarters. The risk of letting inflation simmer, however, is that consumers could start to crack, threatening the engine that drives about 70% of the US economy.
Today, investors will be digesting Exiting Home Sales for February. Economists expect a slight rise in the annual sales rate to 4.17 million from January's 4.0 million, which was nearly -37% lower than January 2022.
On the earnings front, Nike and GameStop are the main highlights. Traders are also keeping an eye on Russia amid China President Xi Jinping's visits. Xi and Russian President Vladimir Putin hold official talks today. There have been concerns among international leaders that China may offer military support to Russia. Some think it's possible that Xi might push harder for a Ukraine peace deal, which could hold some sway as Russia has grown highly dependent on China economically. Most though view the visit as not amounting to much materially, outside of legitimizing Putin's justifications for its invasion of Ukraine at home.
Is China going to agree to provide arms to Russia, which will greatly escalate geopolitical tensions or are they talking about the best way to unwind this mess? Putin and Xi greeted one another yesterday as "dear friend" when they met in the Kremlin, and Russian state news agencies later reported they held informal talks for nearly 4-1/2 hours, with more official talks scheduled for Tuesday. Reporters stated that Xi praised Putin and predicted Russians would re-elect him next year, saying, "Under your strong leadership, Russia has made great strides in its prosperous development". The world would certainly love to know what those two were talking about.
Amazon Announces Another Round of Lay Offs: Amazon has announced yet another substantial round of layoffs, as the internet giant today revealed that a further 9,000 people are set to lose their jobs. In a memo published by CEO Andy Jassy, the company said that the cuts will impact those in its AWS cloud unit, Twitch gaming division, advertising and PXT (experience and technology solutions) arm. “The overriding tenet of our annual planning this year was to be leaner while doing so in a way that enables us to still invest robustly in the key long-term customer experiences that we believe can meaningfully improve customers’ lives and Amazon as a whole,” Jassy said. Amazon is undergoing the largest layoffs in company history after it went on a hiring spree during the Covid-19 pandemic. The company’s global workforce swelled to more than 1.6 million by the end of 2021, up from 798,000 in the fourth quarter of 2019. One of the biggest surprises here is that Amazon’s perennial cash cow AWS has been hit by the layoffs. But while AWS remains in relatively good health, its growth trajectory of late has not been as strong as years gone by, which is reflective of a broader slowdown in cloud infrastructure spending. Put simply, companies are looking to cut costs, which translates into fewer dollars spent on things like cloud computing, Source TechCrunch
Fed's Profits Dramatically Shrinking: In what some are calling a wonderful example of irony, those rate increases have caused the Fed to suffer billions of dollars in operating losses. No, we are not talking about the decline in the market value of the bonds and other assets that the Fed owns, but rather having to send more money out the door than is coming in. Those operating losses mean that the U.S. Treasury is going to be shorted by the billions of dollars of Fed profits that it had been getting for years. Under the Federal Reserve’s rules, all 12 of its regional Fed banks send essentially all their weekly profits to the Treasury, which commingles those Fed remittances, as they’re known, with the money that flows in from taxes and other sources. As you can see from the accompanying chart, the Fed banks’ remittances to the Treasury have been tens of billions of dollars annually for each of the last 10 years. That money has reduced federal budget deficits, which in turn has reduced the amount that the Treasury has had to borrow to pay its bills, and thus has put a bit of downward pressure on interest rates. This year, however, the banks sent only a relatively paltry $55 million to the Treasury in January and February and seem unlikely to send much if anything more to the Treasury any time soon. Source Barrons
NEW Fully Auto Order McDonald's with No Traditional Employees Has Opened in Denver: From what I understand, there are still some people in the back and they will come out to assist with orders or problems. Let's just hope the person that runs and services their shake machines isn't the same guy servicing the robots:
Rolls Royce Looking to Develop Nuclear Reactor... On the Moon: As NASA continues its plans to send humans back to the moon, another country will be funding the effort to get humans living and working on the celestial body. The British car manufacturer Rolls-Royce announced its going to be taking its research out of the this world, as the company received funding from the UK Space Agency to develop a nuclear reactor on the moon, which could power a lunar astronaut base. A power source on the moon would support communication systems, life-support and science experiments while on the on the moon, which would "dramatically increase" the time spent working outside of Earth, the company added. The UK Space Agency said a nuclear reactor is small and lightweight compared to other means of power, and could enable continuous power regardless of available sunlight or other environmental conditions. Source USA Today
Credit Suisse Takeover Deal Will Wipe Out $17 Billion Worth of Bonds: One section of Credit Suisse’s bondholders is set to be wiped out following the struggling bank’s takeover by UBS, causing them to see investments worth 16 billion Swiss francs ($17 billion) become worthless. The Swiss regulator FINMA announced Sunday that the so-called additional tier-one bonds, which are widely regarded as relatively risky investments, will be written to zero as part of the deal. The move has angered Credit Suisse AT1 bondholders as their investments have seemingly been lost, while shareholders will receive payouts as part of the takeover. Usually, equity investments would be classed as secondary to AT1 bonds. According to Goldman Sachs analysts, the wipeout "represents the largest loss ever inflicted to AT1 investors since the birth of the asset class post-global financial crisis. Source CNBC
Job Listings Abound, but Many Are Fake: Not all job ads are attached to actual jobs, it turns out. The labor market remains robust, with 10.8 million job openings in January, according to the Labor Department. At the same time, companies are feeling budgetary strains and some are pulling back on hiring. Though businesses are keeping job postings up, many roles aren’t being filled, recruiters say. In a survey of more than 1,000 hiring managers last summer, 27% reported having job postings up for more than four months. Among those who said they advertised job postings that they weren’t actively trying to fill, close to half said they kept the ads up to give the impression the company was growing, according to Clarify Capital, a small-business-loan provider behind the study. One-third of the managers who said they advertised jobs they weren’t trying to fill said they kept the listings up to placate overworked employees. Other reasons for keeping jobs up, the hiring managers said: Stocking a pool of ready applicants if an employee quits, or just in case an “irresistible” candidate applied. Source WSJ
US Faces a Structural Deficit of Skilled Trade Workers: America needs skilled workers — and supply isn't measuring up to demand. Older workers in the skilled trades are retiring and not enough young people are training up to take their jobs as construction workers, plumbers, electricians and beyond. The construction industry alone faces a gap of a half million workers, according to Construction Dive. And that gap is expected to widen as federal money flows into new infrastructure projects around the country — calling for even more labor. The application rate for technical jobs like plumber and electrician dropped by -49% between 2020 and 2022. "We have this stigma with working with your hands like that's supposed to mean you have less of a brain," says Robb Sommerfeld, co-founder of the National Center for Craftsmanship. "That's absolutely not the case." And while college graduates do earn more on average than trade school graduates, a four-year degree doesn't guarantee a high-paying job. Student debt is rising, and only two-thirds of those with degrees say the debt was worth it, per a YouGov poll. Source Axios
Housing Market "Desperation" Drives Rise of Teardowns: Instead of renovating the pink bathroom from the 1980s and hunter green kitchen of the 1990s, people are knocking down homes and starting from scratch, Curtis Counts, a New Jersey-based real estate sales associate with eXp Realty, tells Fortune. Think of it as causal buyer teardowns, a sort of do-it-yourself house flipper, if you will. But the rise of teardowns isn’t just because of old-fashioned bathrooms. It's the result of a lack of available home inventory and vacant land. That leaves move-up buyers, among others, with little choice but to knock down and start over. “Desperation is becoming a bigger part of the marketplace right now,” Counts said. “I think a lot of [buyers], they’re kind of forced to do it if the stars don’t align…we’re dealing with some pretty severe housing demand needs and people are just getting creative.” However, there are often several permits needed that go beyond what’s needed for an empty lot. So teardowns aren’t an option for everyone, Counts said, rather they’re a solution “available to a very small segment of the marketplace.” When asked how he’d describe that very small segment of buyers, he said affluent—or anyone who has large cash reserves. Expert say the trend is emerging most notable among multigenerational homes. Source Fortune
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