Commentary

Investors today are highly anxious to see the Consumer Price Index (CPI) after the Producer Price Index (PPI) yesterday showed wholesale prices were still running hotter than expected in April. Traders are looking for  a pullback in headline CPI to an annual rate of +3.4% from +3.5% in March, with “core” (strips out food and energy) CPI cooling to +3.6% from +3.8% previously.

Keep in mind, CPI has surprised to the upside for three months in a row now, so adding another “hot” read could make Wall Street more nervous about the possibility of Federal Reserve interest rate cuts this year.

Fed Chair Jerome Powell yesterday reiterated that with inflation remaining stubbornly elevated, the central bank will likely need to keep interest rates on hold for longer than anticipated. Powell also singled out housing inflation, calling it a  “bit of a puzzle” because the slowdown in rent prices still isn’t showing up in the overall shelter data. Powell said he believes this indicates that the lag time for rent price moves to be reflected in the data is longer than previously thought.

Interestingly, Powell also noted that the U.S. economy is responding differently than it has in past tightening cycles. He said he believes this is a result of the high number of Americans who have locked in low-rate mortgages and the many businesses that refinanced at lower interest rates. Those people and businesses aren’t feeling the effects of higher interest rates, which means monetary policy isn’t hitting the economy as strongly as it would have otherwise.

Investors today will also be digesting Retail Sales, Empire State Manufacturing, Business Inventories, and the Housing Market Index.

On the earnings front, Cisco is today’s main highlight. I should mention that Home Depot yesterday reported mixed results, with revenue missing but profit coming in slightly higher than expected (cost-cutting). Home Depot noted that the home improvement customer “is extremely healthy from a financial perspective” and believes the pullback is because consumers are just deferring big projects because of high interest rates.

High rates have also slowed home turnover, which the company said is one of the biggest drivers of home improvement projects.​​​​​​ Overall headlines like below, i.e. Home Depot struggling and Walmart laying people off... should be of concern.

Walmart Cutting Hundreds of Corporate Jobs and Asking Remote Workers to Move to Offices:  Walmart is the country’s largest private employer, with 1.6 million U.S. workers, most of them in stores and warehouses. Walmart has tens of thousands of U.S. corporate workers across the country. Like other companies, Walmart has gradually moved away from remote-work flexibility. It has also shrunk the number of smaller offices scattered around the country. Last year, it closed three tech offices and asked some staff to relocate to central corporate hubs. Workers in small tech-focused offices in Dallas, Atlanta, and Toronto are being asked to relocate to other central hubs like Walmart’s corporate headquarters in Bentonville, Ark., as well as Hoboken, N.J., and Northern California, the company said Tuesday. Source WSJ

Global 'Baby Bust' Has World Alarmed:  The world is at a startling demographic milestone. Sometime soon, the global fertility rate will drop below the point needed to keep the population constant. It may have already happened. Fertility is falling almost everywhere, for women across all levels of income, education and labor-force participation. The falling birthrates come with huge implications for the way people live, how economies grow and the standings of the world’s superpowers. In high-income nations, fertility fell below replacement in the 1970s, and took a leg down during the pandemic. It’s dropping in developing countries, too. India surpassed China as the most populous country last year, yet its fertility is now below replacement. The demographic winter is coming, said Jesús Fernández-Villaverde, an economist specializing in demographics at the University of Pennsylvania. Many government leaders see this as a matter of national urgency. They worry about shrinking workforces, slowing economic growth and underfunded pensions; and the vitality of a society with ever-fewer children. Smaller populations come with diminished global clout, raising questions in the U.S., China and Russia about their long-term standings as superpowers. Some demographers think the world’s population could start shrinking within four decades, one of the few times it’s happened in history.  Source WSJ

Student Loan Rates to Jump the Most in More Than a Decade: Interest rates on federal student loans are climbing for the 2024-2025 academic year, the Education Department’s Federal Student Aid office announced on Tuesday. The new rates are the highest in more than a decade. Rates for federal direct undergraduate loans will be 6.53%, up from 5.5% for the current academic year, and the highest in 16 years, according to student loan expert Mark Kantrowitz. The new rate for direct unsubsidized loans for graduate and professional students is 8.08% for the next academic year, up from 7.05% now, and the new rate for Direct PLUS Loans for parents of dependent undergraduate students and for graduate and professional students is 9.08%, up from 8.05% now. Kantrowitz said the new 8.08% rate is the highest in 24 years, and the 9.08% rate is the highest in 33 years. Source Barrons

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Bayer Q1 Profit Falls Less Than Expected: Bayer beat first-quarter analyst forecasts as it reported a slight drop in adjusted earnings on Tuesday, providing a respite for the CEO's turnaround efforts. The group also lowered its full-year earnings outlook, citing negative currency effects, but retained its operating forecast. The company's quarterly earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted for one-off items, slipped 1.3% to 4.41 billion euros ($4.76 billion), above an average analyst estimate of 4.15 billion euros posted on the company's website. The company said on Tuesday that based on end-of-March exchange rates, EBITDA before special items would likely come in between 10.2 billion and 10.8 billion euros in 2024, compared with a previous target range of between 10.4 billion and 11 billion euros.  Source Reuters

OPEC Leaves Oil Demand Forecast Unchanged: Oil futures settled at a nine-week low on Tuesday, as the Organization of the Petroleum Exporting Countries left its monthly forecasts largely unchanged at 2.2 million barrels a day, or mbd. A slight increase in first-quarter demand from developed economies in the Americas and China was offset by a downward revision to second- and third-quarter demand from the Middle East. OPEC left its forecast for 2025 demand growth unchanged at 1.8 mbd. Supply from producers outside of OPEC+ — made up of OPEC and its allies, led by Russia — is expected to grow by 1.2 mbd in 2024, unchanged from its April forecast and driven largely by the U.S., Brazil, Canada and Norway, OPEC said. Output growth in 2025 is seen at 1.1 mbd, also broadly unchanged from the April outlook. Ahead of the group’s meeting on June 1, OPEC+ members appear to want to keep “everything on the table” as they weigh whether to extend voluntary production cuts due to expire at the end of next month, said Barbara Lambrecht, commodity analyst at Commerzbank, in a note. Members “are likely to wrestle hard with each other at the beginning of June, as OPEC+ would probably risk a further price slide by announcing a gradual phasing out of the voluntary cuts,”  Source MarketWatch

Red Lobster Mass Closings and Auctions: Red Lobster is shuttering more than 50 locations throughout the U.S., according to an auction notice from a liquidation firm, further cementing the seafood restaurant chain’s struggles as it reportedly considers bankruptcy fueled by a large debt load, executive turnover and losses that weren’t helped by a problematic all-you-can-eat shrimp deal. The contents of almost 50 Red Lobster restaurants in California, Florida, New York and more are being auctioned off by TAGeX Brands, with each auction winner receiving the entire contents of the location they bid on. The damage could go even further: Restaurant Business magazine found at least 99 restaurants on Red Lobster's website that were listed as closed on Tuesday, adding up to some 15% of the chain's more than 600 locations.  Source Forbes

US Unveils Sweeping Tariffs on Chinese Goods: President Joe Biden unveiled sweeping tariff hikes on a range of Chinese imports, casting the move as a necessary action to protect US workers and businesses from companies that he accused of stealing, cheating and dumping underpriced goods into international markets. Biden is raising levies on semiconductors, batteries, solar cells, and critical minerals, in addition to previously reported increases on steel, aluminum and electric vehicles. The changes are projected to affect around $18 billion in current annual imports, the White House said. Biden’s changes are staggered to take effect from 2024 to 2026. The biggest jump is for EVs, with the tariff rate quadrupling, while other imports are seeing levies doubled or imposed for the first time. In some cases, the levies apply to areas where China has only a small segment of the US market, but are intended to head off a potential deluge of imports. Source Bloomberg

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