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Wall Street is buckled in for another deluge of economic data and corporate earnings today. Investors yesterday had mixed reactions to the Federal Reserve’s latest policy update and Fed Chair Jerome Powell’s follow-up comments.
As expected, the Fed left its benchmark interest rate "unchanged" at current levels. Bears are pointing to an addition to the policy statement highlighting... “there has been a lack of further progress” in bringing inflation closer to the Fed’s +2% target rate.
In his follow up press conference, Powell also noted this lack of progress, saying that data “have not given us that greater confidence in particular” that rate cuts are appropriate. Bulls, however, are pointing to the Fed’s decision to cut the Treasury runoff from its balance sheet to $25 billion from $60 billion currently. That’s far more than Wall Street expected and was followed by a decline of around -.05% points on both 10-year and 2-year Treasury yields.
Bulls have recently started arguing that higher-for-longer interest rates may not matter so long as economic growth and corporate earnings can hold up. However, bears pointing to recent corporate earnings and comments from CEOs that indicate consumers may be falling under more pressure than what’s being reflected in the “official” data. Starbucks, for example, reported a -6% slide in same-store sales that was only partially offset by higher prices. The company also lowered its full-year profit and revenue forecasts. Starbucks CEO blamed the poor performance and cautious forecast on “a deteriorating economic outlook” that has weighed on customer traffic. Meaning the consumer must be hurting if they are starting to cut back on their +$8 morning drinks.
A slew of other company CEOs, including 3M, Coca-Cola, Colgate-Palmolive, and McDonald’s, have also warned that consumers are falling under greater pressure, particularly those in the lower-income brackets. In fact, some companies have been saying this for the past few quarters.
Many companies have been relying on major cost-cutting or higher prices to juice profits and make up for declining sales. That strategy, however, may be close to hitting its limits as consumers increasingly pull back against paying more for the same product and/or simply can’t afford to buy them any longer.
The top earnings highlight today is Apple, which reports after the close. Wall Street expectations are not high with revenue forecast to decline by around -4.75% and per share earnings decreasing just under -1%. Notably, Apple is the only megacap tech company that does not have some sort of AI product, so investor expectations are high that the company will soon be making a big AI-related announcement.
Other earnings today include Amgen, Block, Cigna, Cloudflare, CNH Industrial, Coinbase, ConocoPhillips, Dominion Energy, DraftKings, Ingersoll Rand, Intercontinental Exchange, Moderna, Monster Beverage, Novo Nordisk, Pioneer Natural Resources, Regeneron, Rocket Companies, Shell, The Southern Company, Vulcan Materials, WestRock, and Zoetis (which I remain a long-term owner of). On the data front, Productivity and Costs, International Trade, and Factory Orders are the highlights.
It’s worth noting that private payroll data from ADP yesterday showed a higher-than-expected jobs gain in April, which is raising some concerns that the official April jobs report tomorrow (Friday) could come in hot.
The JOLTS report showed there are still some 8.488 million job openings as of the last day of March, but this is the lowest number we've seen since February 2021. Interestingly, we still have about 1.3 jobs open and available for every person that looking. And wage gains are still running at around +4.1% annually, which is helping to keep the inflation flames burning hotter than the Fed wants to see, especially if they are going to start cutting rates.
Office-Loan Defaults Near Historic Levels and Climbing: Defaults are reaching historic levels in the office market, as a growing number of owners capitulate to persistently high interest rates and weak demand. More than $38 billion of U.S. office buildings are threatened by defaults, foreclosures or other forms of distress, according to data firm MSCI. That is the highest amount since the fourth quarter of 2012 in the aftermath of the 2008-2009 financial crisis. Office owners are paying back their loans at a much slower rate. As recently as 2021, more than 90% of office loans that were converted into commercial-mortgage-backed securities were paid off when they became due, according to Moody’s. Last year, that figure fell to 35%, the worst payoff rate in the history of the data, which goes back to 2007. Source WSJ
Who is Supplying Russia’s Arms Industry? Despite Western sanctions, Russia’s arms industry is booming. Its production of crucial weapons for its war effort in Ukraine has dramatically increased since the start of the fighting. By the start of this year the monthly capacity for long-range missiles, for example, was thought to have more than doubled. The growth is made possible by new international suppliers, who provide parts, electronics and tools. Piecing together this supply chain is difficult but a recent study suggests that many of the imports lead back to one country - China. Trade with China is not the only problem for Western countries trying to hobble Russia’s defence industry. Despite extensive export controls, Russia still received many Western-made components in 2023. Goods from France, Germany and Japan, for example, made their way to Russia through third countries, such as Turkey and the United Arab Emirates, who have not signed up to Western sanctions. For now, Russia’s production boom looks set to continue. Its defence spending is expected to reach $115bn in 2024, an increase of +68% from 2023. Still, even with help from China and others, Russia cannot keep up the push indefinitely. Source The Economist
Florida Becomes First State to Ban Lab-Grown Meat: Florida has become the first state in the nation to ban the sale of lab-grown meat. On Wednesday, Governor Ron DeSantis officially signed the bill into law, saying the action is intended to "stop the World Economic Forum’s goal of forcing the world to eat lab-grown meat and insects, 'an overlooked source of protein.'” Instead the state will be "increasing meat production, and encouraging residents to continue to consume and enjoy 100% real Florida beef." At least seven states have considered bills so far in 2024 to ban the sale, production or distribution of lab-grown meat, including Alabama, Arizona, Iowa, Tennessee and Texas. Globally, the Italian parliament has banned the technology from their country. The bill is similar to one proposed in France, and Austria and Croatia may soon follow suit. Source Feedstuffs
Google Announces Lay Offs, Moves Positions to India and Mexico: Just ahead of its blowout first-quarter earnings report on April 25, Google laid off at least 200 employees from its “Core” teams, in a reorganization that will include moving some roles to India and Mexico, CNBC has learned. The Core unit is responsible for building the technical foundation behind the company’s flagship products and for protecting users’ online safety, according to Google’s website. Core teams include key technical units from information technology, its Python developer team, technical infrastructure, security foundation, app platforms, core developers, and various engineering roles. At least 50 of the positions eliminated were in engineering at the company’s offices in Sunnyvale, California, filings show. Many Core teams will hire corresponding roles in Mexico and India, according to internal documents viewed by CNBC. Source CNBC
The New Math of How Long to Drive Your Car: There have always been people who relish driving cars till the wheels fall off, but the case for this frugal personal-finance move has grown stronger as the costs of car ownership have ballooned. The average transaction price on a new vehicle was $46,660 in March, compared with $39,950 three years earlier, according to Edmunds, an online car-shopping guide. Repair and maintenance costs are up +8.2% year-over-year, and insurance costs are up +22.2%. To cope, many owners are squeezing more life out of their current ride. U.S. vehicles’ average age hit a record 12.5 years in 2023, increasing for the sixth straight year, according to S&P Global Mobility. In the 1990s, cars with 100,000 miles on them were nearing their end, but now they are aging more gracefully. The economics of long-term car ownership work better with some makes than others. Lexus and Toyota were the two with the fewest problems reported by owners in the first three years after buying them new, according to the latest dependability study by research firm J.D. Power. Electric vehicles had some of the highest rates of problems reported in the study, in part because of their batteries and that they tend to come with more technology built in. Source WSJ
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