Commentary

Stock indexes are lower and could be on track to cap a second losing month. Bulls are hoping the PCE Prices Index this morning will deliver better-than-expected inflation news and help snap the downturn.

Wall Street expects both the headline and “core” (strips out food and inflation) rates to come in unchanged at +2.7% and +2.8%, respectively. Bulls have been battling a deluge of negative headlines this week, including bad news for the tech sector that had led much of this year’s stock gains.

Bloomberg reported yesterday that the US government has essentially stopped issuing licenses to chipmakers for large-scale “AI accelerator” shipments to the Middle East while it conducts a security review. The Middle East is expected to be a massive market, with Saudi Arabia and the UAE already committing some $200 billion to turn the region into an “AI hub.”

That news followed disappointing earnings and forward guidance from Salesforce earlier in the week that has raised concerns about the timeline of AI’s much-hyped profit potential. While the technology itself has gained huge ground, companies are still trying to figure out how to utilize it and turn it into a product that consumers and businesses will pay for.

That headwind was underscored by Salesforce’s lackluster sales outlook. Bears have been warning that investors have gotten ahead of themselves and are pricing in profits that could still be years out. Bears also argue that while big tech behemoths like Amazon and Microsoft did show impressive AI-related growth, the boost remains concentrated among just a handful of companies. What’s more, these companies still need to prove that this growth is sustainable, and bears don’t think it is, especially with the US and other global governments trying to put speed bumps in front of the industry.

Investors this week have also been digesting some troubling geopolitical news. Tensions remain high in the Middle East amid the Israel-Hamas war. In solidarity with Hamas, Houthi rebels have stepped up attacks on ships, threatening to further snarl supply chains and dash hopes of lower inflation. Israel is also sparking tensions with Egypt over control of a key border zone. On the Ukraine front, it was reported late yesterday that the US has given Ukraine permission to use US-provided weapons to strike targets inside Russia. Although the policy of not allowing Ukraine to use long-range weapons remains in place, there are still some worries that the shift risks dragging the US into a direct conflict with Russia.

Today, there’s really no earnings or economic data of note. Next week, however, includes several key economic reports that could heavily influence Wall Street’s expectations for Fed interest rate cuts.

Topping the list is the May jobs report on Friday which Wall Street expects to show another slowdown in both job and wage gains. ISM Manufacturing on Monday and the ISM services gauge on Wednesday will provide the first insights into how May inflation was trending.

Other data next week includes Construction Spending on Monday; Factory Orders and the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday; ADP’s private payroll report on Wednesday; Productivity and Costs and the Trade Balance on Thursday; and Wholesale Inventories and Consumer Credit on Friday.

On the earnings front, the highlights will be Crowdstrike and Hewlett Packard on Tuesday; Campbell Soup, Dollar Tree, and lululemon on Wednesday; and NIO and Toro on Thursday.

US Economy Grew at a Slower Pace Than Initially Thought in Q1:  The Bureau of Economic Analysis's second estimate of first quarter GDP showed the economy grew at an annualized pace of 1.3% during the period, down from a first reading in April of 1.6% growth and in line with economist estimates. The update to the first quarter growth metric primarily reflected a downward revision to consumer spending, per the BEA. Personal consumption in the first quarter grew at 2%, down from a prior reading of 2.5%. The weaker headline growth statistic looks discouraging, but it belies solid underlying momentum as the economy’s core, private domestic sales to domestic purchasers, showed a healthy expansion of 2.5% annualized, Nationwide financial markets economist Oren Klachkin wrote. Many forecasters don't see the first quarter economic growth slowdown as the start of a broader trend. Prior to Thursday's reading, Goldman Sachs expected 3.2% annualized growth in the second quarter. Meanwhile, the Atlanta Fed's GDPNow forecaster is currently projecting 3.5% annualized growth in the second quarter.  Source YahooFinance

Home Price Drops Hit Highest Level in 18 Months: Nationwide, 6.4% of home sellers cut their asking price during the four weeks ending May 26, on average, the highest share since November 2022. The median asking price dropped roughly -$3,000 to $416,623 in the last week, the first decline in six months. Additionally, for-sale supply is growing more stale: Age of inventory (the number of days active listings have been on the market) started rising year over year in May for the first time in eight months, hitting a median of 46 days. Together, those metrics suggest sale-price growth could soften in the coming months as persistently high mortgage rates turn off homebuyers. For now, the median-home sale price is up +4.3% year over year to another record high, though sale prices are a lagging indicator because they’re typically negotiated at least a month before a deal closes. High costs are dampening demand.  Pending sales are down -3.4% year over year, on par with declines over the last month, and mortgage-purchase applications are sitting near their lowest level in six months. Low inventory is another factor pushing down sales. Even though +7.8% more new listings hit the market than during the same period last year, listing growth has been losing momentum for the last few months. Source Redfin

Walmart Store Managers Really Can Make Half-a-Million a Year: Earlier this year, Walmart redesigned its compensation scheme in a way that would significantly increase store manager pay with stock grants and bonuses. Managers now receive annual stock grants of as much as $20,000. Average base salaries for store managers were raised to $128,000 a year, from $117,000. The retailer also changed the way it calculates those managers’ bonuses. In total, a successful manager of a high-performing store can now pass the $500,000 mark. The initiatives have helped boost retention and lowered turnover rates in the last year. The company declined to share exact figures for either metric, but according to Revelio’s data, Walmart’s annual attrition rate has fallen by about -2 percentage points in the last year to about 21%. Attrition is expensive for any company. For Walmart it comes with its own set of problems. Because the retailer tends to hire from within—about 75% of its field management team began their careers as hourly employees—Revelio says that when managers leave, they take many years of institutional knowledge with them. Managers say the job is like being the chief executive officer of a small business mixed with a local politician. Source Bloomberg

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OpenAI Shuts Down Influence Networks Using Its Tools in Russia, China: OpenAI said it has cut off five covert influence operations in the past three months, including networks in Russia, China, Iran and Israel that accessed the ChatGPT-maker’s artificial intelligence products to try to manipulate public opinion or shape political outcomes while obscuring their true identity. The new report from the ChatGPT-maker comes at a time of widespread concern about the role of AI in global elections slated for this year. In its findings, OpenAI listed the ways in which influence networks have used its tools to more efficiently deceive people, including using AI to generate text and images in larger volume and with fewer language errors than would have been possible by humans alone. But the company said that ultimately, in its assessment, these campaigns failed to significantly increase their reach as a result of using OpenAI’s services Source Bloomberg

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What Poker Can Teach You About Selling Stocks: Investors usually dislike gambling comparisons. Yet at a recent conference held by Norges Bank Investment Management, which oversees Norway’s oil fund of $1.6trn, a packed hall sought to learn from a former poker pro. Annie Duke was there to talk about quitting decisions, a topic on which she wrote the book (“Quit: The Power of Knowing When to Walk Away”). Ms Duke argued that many factors stack the deck against people considering quitting, pushing them to act irrationally. That applies to poker players wondering whether or not to fold—and also to investors considering whether to exit a position. Selling out of a position is much harder to do well than buying into it. People hate losses a lot more than they enjoy equivalent gains (“loss aversion”) but reserve a special loathing for crystallizing a certain loss, even if the probable alternative is a greater one (“sure-loss aversion”). Ms Duke’s prescriptions for these problems are at once obvious and underused. Most important, recognize that buying and selling are two sides of the same coin and start treating them as such.  Source The Economist

Gen Z Drives Teen-Worker Comeback: Gen Z is reversing a decades-long decline in teen employment. Working for pay can be a key rite of passage for teens as they grow up, but it’s not nearly as common as it used to be. “There is something lost when there are more young people who enter the workforce after college with no work experience,” says Jean Twenge, a psychologist and author of the book "Generations." “When they learn those lessons about how important it is to show up on time and do a good job and sometimes you have to listen to the boss, all of it builds conscientiousness for later in life.”In the 1980s, nearly 2 in 3 16- to 19-year-olds were working or actively looking for work. That’s been steadily falling since then, with teens’ labor force participation rate dropping especially low among millennials in the 2000s. But Gen Z is starting to bring teen jobs back. The share of teens working or looking for work recently hit a 14-year high — 38%. In the coming weeks, employers are expected to add another 1.3 million summer jobs for teens, according to the firm Challenger, Gray & Christmas. Source Axios

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