Investors are braced for a busy and potentially volatile week with the Federal Reserve's policy meeting on Tuesday-Wednesday, the April Employment report on Friday, and another heavy round of Q1 earnings results all on the calendar.

Most on Wall Street expect the Fed at its two-day policy meeting to lift interest rates by another 25 basis-points but what might come next is being hotly debated. Bulls have been betting that this is the Fed's last rate hike in this cycle and may be their last rate hike for an extended period, pointing to turmoil in the banking sector and signs that the economy and inflation continue to cool.

In particular, bulls agree with many Fed members that think the bank headwinds are creating drastically tighter financial conditions that will further slow the economy and push inflation back down to the Fed's target level of around +2%.

There are a lot of worries on Wall Street that a combination of tighter credit together with continued Fed interest rate hikes could make a potential economic downturn even more severe. However, bears point out that recent data doesn't indicate any major signs of economic distress and that the banking troubles are isolated and contained. Notably, despite some pullbacks from their peaks, the labor market, wage growth, and consumer spending remain strong. These are areas that the Fed has continuously pointed to as key drivers of inflation.

Bears also warn that even if the Fed does pause its rate hikes, it could be forced to resume them later this year if inflation remains persistently high.

The March PCE Prices Index on Friday showed a sizable dip in inflation with the headline rate pulling back to +4.2% year-over-year versus +5.1% in February thanks to a big drop in energy prices. The PCE price index for gasoline and other energy goods plunged by -4.6% in March from February and by -20% year-over-year. By contrast the "core" rate that strips out food and energy barely budged, slowing to +4.6% from +4.7% previously. Overall, the "core" rate, which is one of the Fed's preferred inflation gauges, has been stuck between +4.6% and +4.7% since December. It peaked at +5.3% back in February 2022 and hasn't fallen below +4.6% since October of 2021.

The Fed began its tightening campaign in March 2022 and has since lifted its benchmark rate by 475 basis points from near zero to the current 4.75%-5.00% range.

Economic data today includes Construction Spending and the ISM Manufacturing Index.

On the earnings front, one of the top highlights this week is Apple, which reports on Thursday after markets close.

Microsoft, Google-parent Alphabet, Amazon, and Facebook-parent Meta Platforms all delivered better-than-expected results last week with all but Amazon and Alphabet providing upbeat guidance.

In total, about 53% of S&P 500 companies have reported with around 80% topping expectations, according to FactSet. This puts S&P 500 companies on track for a -3.7% earnings decline in Q1, up from -6.7% at the end of March.

Earnings highlights today include Avis Budget Group, Chegg, Diamondback Energy, KBR, SoFi Technologies, and Stryker. Be prepared for a very busy week on Wall Street...

Interesting Housing Data: According to a new report released by nationwide property data provider ATTOM, "cash purchases" hit historic highs in the first quarter of 2023. All-cash purchases made up 39.3% of single-family home and condo sales. That's a big number, but I could also argue that overall sales in generally had to be extremely low considering the overall lack of inventory and willing home sellers. Home prices hit new highs during the first quarter of 2023 in only six of the 139 metro areas in the report. The largest increases in median prices from the fourth quarter of 2022 to the first quarter of 2023 came in Ogden, UT (up 7.2 percent); Naples, FL (up 6 percent); Savannah, GA (up 5.8 percent); Fort Myers, FL (up 5 percent) and Crestview-Fort Walton Beach, FL (up 4.9 percent). Home sales following foreclosures by banks and other lenders represented 1.7 percent, or only one of every 59 U.S. single-family home and condo sales in the first quarter of 2023. Despite the foreclosure number growing just a bit in 2023, it remained just a tiny fraction of the 30 percent peak hit in 2009 during the aftermath of the Great Recession. Institutional investors nationwide accounted for 5.4 percent, or one of every 19 single-family home and condo purchases in the first quarter of 2023. That was down from 6.6 percent in the fourth quarter of 2022 and from 6.1 percent in the first quarter of 2022. Source

Charlie Munger Warns of "Trouble" for Banks Amid Possible Commercial Real Estate Crash: Berkshire Hathaway vice chairman Charlie Munger sounded the alarm this weekend over the worrisome state of America’s commercial real estate, noting U.S. banks were saddled with “bad loans” amid falling property prices. “It’s not nearly as bad as it was in 2008,” Warren Buffett’s right-hand man told the Financial Times in an interview published Sunday. “But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits…When bad times come they lose too much.” Berkshire Hathaway in the past has backed banks in tough times. But now, with a handful of bank failures being followed by possible commercial property crash, Berkshire Hathaway isn’t getting involved. One major concern is risk stemming from commercial property loans in bank portfolios. “We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There’s a lot of agony out there," Munger said. He acknowledged Berkshire Hathaway’s past success with bank investments. But he also referred to lessons learned. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing. Source Fortune

Construction Employment is Higher Than Ever: The building boom has helped push unemployment to around its lowest level in more than 50 years. That is perplexing investors who want to see the Federal Reserve switch course on interest rates. Construction spending and employment have risen to new records this year, boosted by government outlays for infrastructure, a domestic manufacturing renaissance, and a wave of apartment building that got off to a slow start during the pandemic when prices for building materials, such as lumber, were sky high. Construction companies with jobs ranging from airport overhauls to bathroom renovations say they have enough work booked to maintain payrolls—for years in some cases. Even home builders are ramping up into spring. The sector is usually among the first to suffer job loss when borrowing costs rise. So far, the roughly $50 billion decline in residential construction spending over the past year has been more than made up for by gains in commercial projects, including highways, hotels, and hospitals. A record $108 billion was spent building factories last year, and risen this year to a seasonally adjusted annualized rate of about $141 billion in February. Though prices for lumber and other materials have come down, developers now face construction financing that is about twice as expensive as it had been and landlords are unlikely to be able to offset greater borrowing costs with rent increases, which should hinder new projects. Source WSJ

US is Short on Repossession Agents: The repossession industry is seeing an uptick in demand as more Americans struggle to afford their car payments. And companies that specialize in seizing vehicles are having trouble hiring enough agents, after many decamped for other jobs during the pandemic when business largely dried up due to stimulus measures. At the North American Repossessors Summit in Orlando earlier this month, many attendees reported staffing shortages and said they’re gearing up for boom times. In March, the percentage of subprime auto borrowers who were at least 60 days late on their bills was 5.3%, up from a seven-year low of 2.58% in May 2021 and higher than in 2009, the peak of the financial crisis, according to data from Fitch Ratings. Source Bloomberg

Colorado Company Claims to Have Made First Biometric Smart Gun: Biofire, which started as a high school science project in 2012, says it has now invented the first working biometric smart gun. It requires facial recognition and fingerprint verification to unlock and shoot. The company is now accepting pre-orders. "The basic premise of a smart gun — a firearm that only works for you — is sort of obvious and uncontroversial," Kloepfer told NPR. "The challenge is nobody's ever built one that always works for you and never works for anybody else." Biofire's smart gun is a handgun with a small fingerprint sensor on the grip and a 3-D facial recognition sensor on the back. If someone who is authorized to use the weapon picks it up, it lights green and turns on. Once they put it down, it turns off. If anyone else picks up the gun, it won't fire. Gun advocates like the NRA oppose smart guns over concerns that future government regulations could require that all guns are replaced with smart guns. Kloepfer said he's not interested in government mandates. His objective is only to reduce gun deaths among children. Source Insider

Streaming is Killing Late-Night TV: The shift toward streaming is claiming another legacy TV victim: Late-night television. The rapid decline in both viewers and ad revenue is forcing networks to turn to cheaper alternatives, threatening the future of the 70-year-old genre. Notably, CBS aired the final episode of "The Late Late Show with James Corden" last Thursday night. Rather than find a new host, the network is ending the 28-year-old show entirely. (Corden was the show's fourth host.) In its place will be a trivia-themed game show that will be significantly cheaper to produce than "The Late Late Show," according to a source with knowledge of the plans. Late-night TV is expensive — with the top hosts like Colbert and Jimmy Fallon making north of $15 million per year — and the social media age has dramatically changed how viewers watch them, choosing online clips the next morning over live viewing. Across the top six late-night programs, ad revenue is down more than -50% since 2014, and more than -60% from its peak in 2016 Source Axios

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