Commentary

Stock traders are treading cautiously ahead of key inflation data that could have a big impact on Federal Reserve interest rate expectations.

The spotlight today is on the Producer Price Index (PPI). Wall Street expects a slight uptick in headline PPI to an annual rate of +2.2% from +2.1% in March and a decline in the “core” rate (strips out food and energy) to +2.3% from +2.4% previously.

Investors are extremely nervous that CPI tomorrow will come in “hot”, so a stronger-than-expected PPI read could compound those concerns and push more bulls to the sidelines.

Investors will also be tuning in to Fed Chairman Jerome Powell today, who is scheduled to participate in a discussion at a banking industry event in Amsterdam. Traders will be listening closely for any hints about the Fed’s current thinking, though not much has changed since the central bank’s most recent policy update at the start of the month. Fed Vice Chair Philip Jefferson yesterday mostly repeated what other officials have said recently - inflation is still too high to justify rate cuts.

A lot of bears this week are sounding warnings that the Fed may have to cut rates soon but not for the reasons hoped. They see a major economic slowdown brewing, which they believe could quickly reach recession-level fallout due to the Fed’s tight monetary policy.

There are also some bears who think “stagflation”, aka little to no growth and high inflation, is a possible outcome. These concerns will keep a spotlight on retailer earnings over the next few weeks, starting with Home Depot and On Holding today.

Many companies this quarter have already warned that consumers are pulling back amid still-high prices. For retailers, this is raising a lot of concerns about margins as most are now being forced to compete for consumers by cutting prices and/or offering more deals.

It’s worth noting that consumer spending on “experiences” remains strong, and even at or near record levels for some industries, including cruises and live concerts.

Some economists have argued that the pullback in goods spending may partially stem from consumers revolting against ever-higher prices. Meaning the slowdown in spending may be sending false signals about the health of US consumers.

A couple of categories that have really been hitting the consumer hard are the continued higher prices in housing and health care costs.

Remember, shelter makes up over 36% of the headline CPI and Health care is thought to be around 6.5%, about the same as energy. I have to believe higher rents and relentlessly higher healthcare costs are just killing some American's budget, and I'm not sure I see these retreating anytime real soon, meaning overall inflation could stay hotter for longer than many have anticipated. 

Over 1 in 3 US Homes Are Bought With Cash: All-cash home purchases are on the rise, according to new data from Redfin. Rich people can adapt to this pricey market more easily than typical buyers needing a loan. Those winning in this economy treat homes like savings accounts, Redfin chief economist Daryl Fairweather says. It's a relatively safe place to store your cash, and you can always borrow against the home if you need to tap into it. Some of these all-cash purchases are investors, but certainly not all. The South, for instance, is a popular migration destination, Fairweather says. People from high-cost cities like Boston can sell their pricey homes and use the profits to purchase a house in cities like Atlanta with all cash. Mortgaged home sales are down year over year, per the report. Lack of affordability has pushed would-be first-time buyers to the sidelines. You have to be a high-income earner/dual household to buy in this market, North Carolina agent and first-time buyer specialist Jeff Clay tells Axios  Source Axios

Russia Ramping Up Sabotage Across Europe: A fire that broke out in the Diehl Metall factory near Berlin earlier this month was not in itself suspicious. What raised eyebrows was the fact that Diehl’s parent company makes the IRIS-T air-defense system which Ukraine is using to parry Russian missiles. The only reason it is even suspected is because there is evidence that Russia’s covert war in Europe is intensifying. In April alone a clutch of alleged pro-Russian saboteurs were detained across the continent. Germany arrested two German-Russian dual nationals on suspicion of plotting attacks on American military facilities and other targets on behalf of the GRU, Russia’s military intelligence agency. Poland arrested a man who was preparing to pass the GRU information. Britain charged several men over an earlier arson attack in March on a Ukrainian-owned logistics whose Spanish depot was also targeted. A number of Baltic states have also accused Russian intelligence services of recruiting middlemen to attack property and deface monuments. In March an ally of a Russian opposition leader was attacked with a hammer in Lithuania’s capital, Vilnius. Russian cyber operations have also grown bolder, attacking infrastructure targets in America, Poland, and France. Western officials say they have no clear explanation for the uptick in Russian activity. Some think Putin might have hoped that troublemaking in Europe would put pressure on the West to restrain Ukraine and limit its own involvement in the war.  Source The Economist

Big Tech Rivals Gold as Inflation Hedge: The biggest US tech stocks are not only a bet on innovation but also a possible hedge against inflation, according to some respondents in the latest Bloomberg Markets Live Pulse survey. Gold, the haven of choice for decades, is still seen as the best safeguard against the risk of rising prices, according to 46% of survey participants. But almost a third said the tech behemoths are their first pick for the role. Stock gains lend this finding some merit. Nvidia has surged more than six times since inflation first rose past 2% in March 2021. Even Apple Inc., which has seen peaks and valleys, has outperformed the broader market in that timeframe, gaining over +50% to the S&P 500’s roughly +30%.  A majority of the survey’s respondents — 59% of 393 — cited resurgent inflation as the top tail risk facing financial markets between now and the end of the year. About a quarter of respondents pointed to a US recession as the top risk of 2024. In that case, Treasuries and not stocks would offer a better shield, the survey shows. Source Bloomberg

First Human to Receive Pig Kidney Transplant Dies: The first person to undergo a transplant procedure for a genetically modified pig kidney has died, the hospital that performed the surgery and his family said. Rick Slayman died suddenly, both his family and doctors said, nearly two months after he received the kidney in a four-hour procedure in March. The Associated Press reported that the surgeons believed the pig kidney would last for at least two years. The transplant team at Massachusetts General Hospital (MGH), which performed the procedure, said they have “no indication” that his death was caused by the transplant. Slayman’s nephrologist recommended that he get a pig kidney transplant, which was approved in February by a Food and Drug Administration Expanded Access Protocol allowing a patient to receive experimental treatment when there are no comparable treatment options. Source The Hill

‘Roaring Kitty’ and GameStop are Back: Shares of GameStop soared out of the gate Monday, with the stock price increasing more than 70% in the first 45 minutes of trading. No need to check your calendar. It’s not 2021. But the reason for the surge was the same as the year the retailer became the first meme stock: An individual investor who goes by the name Roaring Kitty. Keith Gill, who has been silent on social media for the past three years—and whose evangelism for GameStop shares led to a massive run-up in the stock—posted an image Sunday. And that was enough to mobilize the meme stock army. The volatility led to trading in the stock being halted several times early Monday.  Year to date, GameStop shares are up more than 60%. That’s despite reporting fourth-quarter earnings at the end of March that were far below analyst expectations and revenues of just $1.79 billion, nearly -$500 million less than the year before. Source Fortune

Airlines Sue Biden Admin Over “Junk Fee” Rule: Major airlines including Delta and United are suing the Department of Transportation over new rules that force them to disclose surprise fees, weeks after the Biden administration announced the changes to so-called “junk fees.”  The lawsuit alleges the new rules, which require airlines to disclose service and surprise fees, are “arbitrary, capricious, an abuse of discretion and otherwise contrary to law,” according to a copy of the suit reviewed by Reuters. The first of the Transportation Department’s new rules, announced in late April, require airlines to automatically offer full refunds in the event of canceled or significantly delayed flights. The second requires disclosure of fees associated with air travel, such as for checking bags or changing reservations. The rules, proposed in December 2022, were developed in response to President Joe Biden’s 2021 executive order entitled “Promoting Competition in the American Economy.”  Source Forbes

Demand for Vacation Mortgages Plummets: Demand for second-home mortgages fell twice as fast as mortgage demand for primary homes in 2023, as housing costs rose to new heights. U.S. homebuyers took out 90,772 mortgages for second homes in 2023, down -40% from a year earlier and down -65% from the height of the pandemic housing boom in 2021. For the sake of comparison, mortgages for primary homes fell at half that rate, down -20% year over year in 2023 and down -35% from 2021. The share of total mortgages that went to second-home buyers also dropped last year: 2.8% of all mortgage originations in 2023 were for second homes, down from 3.6% in 2022 and 5.1% in 2021. An early look at this year’s data shows that demand for vacation homes hasn’t picked up in 2024 - interest in second-home mortgages has been sitting near an 8-year low all year, according to a separate Redfin analysis of data from Optimal Blue. They declined -7.3% from a year earlier in April. By comparison, mortgage-rate locks for primary homes declined -1.6%. Source Redfin

1-May-14-2024-11-04-35-6778-AM
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