Bulls of course hope this is the last rate hike of the cycle and still anticipate rate cuts later this year.
Keep in mind, turmoil in the banking sector has been one key factor behind this thinking. However, many argue that those troubles seem to be mostly in the rear view - at least for now - after JP Morgan bought First Republic yesterday. While more headwinds could lie ahead for banks, JP Morgan's purchase effectively ends the "crisis" that began back in March.
As for inflation, "hawks" point out that while inflation has come down from its peak, recent data indicates that it remains stuck at levels more than double the Fed's target rate which is going to be tough to crack.
ISM Manufacturing data yesterday actually showed that wholesale prices accelerated in April after backing off a bit in March. What's more, the employment component showed that hiring expanded after two months of contraction. At the same time, April manufacturing activity remained in contraction territory for a fifth straight month which is feeding growing worries that the US economy is headed for a period of "stagflation," or persistent inflation mixed with slowing economic growth and high unemployment.
This is widely considered one of the worst conditions for the economy as there is little that monetary policy can do to shift the trend. That's because measures designed to spur the economy and employment tend to fuel inflation while those that fight inflation typically keep a lid on growth and depress the job market. This leaves the central bank stuck just watching the economy struggle to stay above water until it either corrects itself to the upside or something "breaks" and sends it into a downward spiral. Meaning that even if the Fed does pause rate hikes, it may not do much to boost stocks in the longer term if we can't bust out of the inflation cycle.
Today, investors will be digesting Factory Orders and the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS report is a backward look to March but still has implications for the Fed. Namely, officials want to see further declines in the number of job openings as that has the effect of cooling wage gains.
On the earnings front, Advanced Micro Devices, Clorox, Ford, Marathon Petroleum, Molson Coors, Pfizer, Prudential Financial, Starbucks, T. Rowe Price, and Uber are today's highlights.
It's all about the Fed's announcement tomorrow afternoon, followed by Chair Powell's press conference, and Apples earnings and forward guidance scheduled for release on Thursday.
Godfather of AI’ Quits Google to Talk Openly About the Dangers: Geo ffrey Hinton, known to some as the “Godfather of AI,” pioneered the technology behind today’s most impactful and controversial artificial intelligence systems. He also just quit his position at Google to more freely criticize the industry he helped create. In 2012, Hinton, a computer science researcher at the University of Toronto, and his colleagues achieved a breakthrough in neural network programming and were soon approached by Google to work alongside the company in developing the technology. But in light of AI’s more recent, controversial advances, Hinton expressed to The New York Times that he has since grown incredibly troubled by the technological arms race brewing between companies. He said he is very wary of the industry’s trajectory with little-to-no regulation or oversight and is described as partially regretting his life’s work. Look at how it was five years ago and how it is now, take the difference and propagate it forward, and that's scary. Source Popular Science
Apple Brings In +$1 Billion First Week After Offering High-Yield Savings Account: Apple’s freshly launched high-yield savings account brought in as much as $990 million in deposits over its first four days, according to two sources familiar with the matter. On launch day alone, the savings account drew nearly $400 million deposits. The account’s eye-catching 4.15% annual return, plus the ubiquity of iPhones, is likely the main driver for account openings, especially when the average bank is paying less than half a percent. By the end of launch week, roughly 240,000 accounts had been opened, one source adds Source Forbes
Debt Ceiling Limit Could be Hit by June 1: Treasury Secretary Janet Yellen on Monday warned that the United States may run out of measures to pay its debt obligations by June 1, earlier than the government and Wall Street had been expecting. In a letter to House Speaker Kevin McCarthy, Yellen said new data on tax receipts forced the department to move up its estimate of when the Treasury Department “will be unable to continue to satisfy all of the government’s obligations” to potentially as early as June 1, if Congress doesn’t raise or suspend the debt limit before then. This date is earlier than Wall Street economists were expecting. Goldman Sachs’ latest estimate this week put the deadline at some point in late July, though the bank’s economists acknowledged that weaker-than-expected tax receipts could advance that timeline. Goldman Sachs last week was pegging the deadline at some point in late July. While there is technically a month between the date of the letter and the earliest x-date, there are only eight legislative days this month when both the House and Senate will be in session at the same time. Source CNBC
Diamonds Face a "Lab-Grown" Challenge This Wedding Season: More than a third of all engagement rings with center stones purchased last year were created in a lab, according to an online survey of nearly 12,000 U.S. couples by wedding-planning website The Knot. That’s double the number from 2020. As the technology to make lab-grown diamonds has improved, production has increased and retail prices are falling. Their growing popularity, especially among younger consumers, has caught the attention of jewelers and watchmakers — and is challenging traditional diamonds that are mined from the earth. It’s not just engagement rings. Diamonds grown in a lab accounted for 13.6% of the $88.6 billion in diamond jewelry sold globally in 2022, up from less than 1% in 2015 where they had hovered since the early 2000s, according to Paul Zimnisky, a diamond industry analyst. Some consumers want lab-grown diamonds because they view them as more socially and environmentally sustainable. But price is also a factor. Man-made diamonds retail for about a quarter of the price of traditional diamonds, depending on the size. As of early this year, a 1 carat lab-grown diamond retailed for $1,430 compared with $5,635 for the same-size mined diamond. Source WSJ
Why First Republic Bank Collapsed: First Republic was taken over by the Federal Deposit Insurance Corporation (FDIC) at a cost of about $13 billion to the regulator. The lender suffered a flight of deposits in the first quarter of 2023, leaving it scrambling to address a liquidity crunch. JPMorgan stepped in to buy the bank after regulators took control, saying in a press release that it would acquire $92 billion of First Republic deposits. First Republic's customer base was very wealthy clients who rarely defaulted on loans. But that also meant many held much more than the $250,000 deposit limit insured by the FDIC. At the end of 2022, two-thirds of First Republic's deposits were uninsured. When SVB and Signature Bank failed, these wealthy customers fled First Republic in droves for fear of losing their cash. Deposits dropped 41% to $104.5 billion in the first three months of this year. They appeared to have fallen by another $12 billion by the time of JPMorgan's acquisition, based on the $92 billion deposit figure it cited. In addition, First Republic sought to woo its wealthy clients with very cheap mortgages when interest rates were at rock-bottom. The combination of falling deposits and rising losses on its mortgage book doomed the regional lender. Source Insider
American Airlines Pilots Authorize Strike Mandate: North American pilots took fresh steps on Monday to press for workforce gains, with American Airlines Group pilots backing a strike mandate and Air Canada pilots supporting a merger with a larger union. American Airlines pilots approved the mandate ahead of the busy summer travel season to further pressure the Texas-based carrier for a contract, although the chances of them actually walking off the job remain slim. The Allied Pilots Association (APA), which represents about 15,000 American Airlines pilots, held a strike authorization vote in April, even as the two sides closed in on an agreement in principle. Separately, a majority of the estimated 4,500 pilots who fly for Canada’s largest carrier voted 84% for a March agreement to merge with the Air Line Pilots Association (ALPA), the two unions said in a statement. A merger with ALPA, the world’s largest pilots union with more than 60,000 members, is seen as beneficial, in part, for providing additional bargaining resources. Air Canada pilots are not currently in negotiations. Source Reuters
What US "De-Risking" From China Could Look Like: The U.S. isn’t trying to decouple from China, just “de-risk,” U.S. National Security Advisor Jake Sullivan said last week. But he also indicated the complexities of de-risking such an entangled relationship—and therein lies the challenge for companies and investors. Deteriorating U.S.-China relations, with both countries increasingly viewing their relationship through a national security lens, are already weighing on companies trying to gauge what the next phase of this relationship will look like. For investors, the concern is what types of emerging technologies—such as advanced semiconductors, quantum computing, artificial intelligence, and synthetic biology—could fall under the national security banner over time. Investors are also looking for potential beneficiaries of this changing world order, including companies that can capitalize on the push to diversify supply chains. The latest AmCham survey found that 27% of members are reprioritizing other countries for supply chains, up from 21% earlier in the year, and on top of the almost 25% of members who said that they were considering or already relocating supply chains. Source Barrons
TSA Rolling Out New Facial Recognition Technology: A new facial recognition technology is automatically matching passengers' real-time pictures to their IDs at Baltimore-Washington International/Thurgood Marshall Airport. The Transportation Security Administration has started using 36 new credential authentication technology units at the airport. A passenger inserts their ID into the unit for it to scan it, and the unit snaps a picture of the passenger and matches it with the photo on the ID, while automatically checking if they're due to fly out of the airport that day, and if the document is valid. The unit has a library of over 2,500 types of IDs for reference and the photos are not stored. In other words, passengers won't have to hand TSA officers their boarding passes to clear security, while it's business as usual for the airline check-in process. TSA started using the technology in 2022, and similar units are also being used at Denver International Airport, and Salt Lake City International Airport, among others. Source Insider
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