Interestingly, the Fed's new policy statement left out a sentence saying “the Committee anticipates that some additional policy firming may be appropriate,” which has been included since rate hikes began in March 2022. Wall Street interprets this to mean that the Fed is ready to pause rate hikes at the June 13-14 meeting. At his follow-up press conference, Fed Chairman Jerome Powell said no decision has been made on whether to pause next month, saying more data was needed before they'll know if the fed funds rate is restrictive enough. He also reminded that the Fed is "prepared to do more" if data supports further tightening.
Powell also noted that he and his colleagues expect inflation will be slow to come down, meaning it could be some time before rate cuts are "appropriate." And as he has done numerous times, the Fed chief singled out the strong labor market, saying conditions likely need to weaken further in order for services inflation to come down. Assuming that the next month of data doesn't show inflation surging again, investor debate from here will likely begin to focus more heavily on when the central bank will start to cut rates.
Over the past 50 years, the average period of time between the last rate hike and the first rate cut has been six months. If yesterday's increase was the last rate hike of the cycle, the historical average would suggest a rate cut around November. The June Fed policy decision will include new economic forecasts including an update of the so-called "dot plot", which charts each members' estimate of the Fed funds rate.
The path forward for the Fed is also complicated by the threat of recession, though Powell said is personal forecast is for "modest growth." Many on Wall Street believe the odds of recession are high, particular after the collapse of three banks that have led most others to tighten lending standards. Historically, when banks pull back on lending, unemployment has always risen.
Another thing raising red flags for recession watchers is the collapse in oil prices. West Texas Intermediate crude futures slid to $69 a barrel yesterday while Brent was down to $73.24. Oil insiders equate the weakness to recession fears. However, economists note that in the most recent recession before the pandemic, oil prices soared in the run up to the downturns.
Another "red flag" is the decline in diesel prices which have now fallen to their lowest level in over 13 months to $4.07 a gallon. The plunge in diesel is linked to a decline in freight demand, which is tied to a slowdown in consumer goods demand.
A pullback in consumer spending, which accounts for more than two-thirds of US economic activity, could in and of itself lead to recession. Recent data does imply that consumer spending has moderated but the details paint a slightly different story.
While purchases of goods has mostly flatlined, spending on services continues to increase. Lower gasoline prices, which are down some -15% from last year, have also been a big contributor to the decline in goods spending. Meaning consumers have still not pulled back so much as shifted where they spend their money.
International Trade and Productivity and Costs data are due today. The most critical news today might come from Apple, which announces earnings after the market close. Apple is the last of the big tech mega caps to report, following Google-parent Alphabet, Amazon, Facebook-parent Meta, and Microsoft. All four delivered strong results last week and helped boost stock indexes overall.
Other earnings today include AnheuserBusch InBev, ConocoPhillips, Coinbase, DoorDash, DraftKings, Hyatt Hotels, Kellogg's, Live Nation, Moderna, Rocket Companies, Royal Caribbean, Shell, Shopify, and Zoetis.
Ex-Fed President Kaplan Says Bank Pain Is Just Getting Started: The US regional banking crisis is far from over and the Federal Reserve should pause its rate hike campaign, according to former Federal Reserve Bank of Dallas President Robert Kaplan. Adding that he'd prefer to do what’s called the hawkish pause, not raise but signal that we are in a tightening stance because he actually thinks the banking situation may well be more serious than we currently understand. Kaplan went on to say that bank equities have been marked down solely because of their over-investment in US Treasuries, while the credit phase, which is “normally more serious,” is yet to unfold. It is more important to be able to sustain the current rate for an extended period of time, longer than the market thinks than to get another 25-50 basis points and risk having to cut again, I think that will be very troubling,” said Kaplan, who left the Fed in 2021 after disclosures about his trading activity that drew criticism for potential conflicts of interest. Source Yahoofinance
No More Cooking or Heating Your Home with Gas in NY: New York has become the first state in the nation to pass a law banning natural gas and other fossil fuels in most new buildings, a move that could help reshape how Americans heat and cook in their homes in the coming decades. The law effectively requires all-electric heating and cooking in new buildings shorter than seven stories by 2026, and in 2029 for taller buildings. Dozens of cities and counties have adopted bans on gas hookups in new buildings, part of a national movement to cut emissions from homes and businesses. Source Washington Post
Darden Buys Ruth’s Chris Steak House for $715 million: Darden Restaurants announced yesterday it is buying Ruth’s Hospitality Group, the parent company of Ruth’s Chris Steak House, for $715 million. Overall, the deal values Ruth’s at $21.50 per share in an all-cash transaction. It's worth mentioning, this is Darden’s first acquisition in six years when they bought Cheddar’s Scratch Kitchen in 2017 for $780 million. This acquisition will allow Ruth Chris to join Darden’s fine-dining portfolio, which already includes The Capital Grille and Eddie V’s. Additionally, they also own Olive Garden, LongHorn Steakhouse, Cheddar's, Yard House, Seasons 52, and Bahama Breeze. I'd also like to add Ruth Chris has more than 150 locations worldwide and generated $505.9 million in revenue in 2022. Not a bad exit for a divorced single mother that bought a steakhouse in New Orleans that needed money to send her teenage sons to college... This deal should make things interesting for the upcoming sale of Subway. Source Ap News
Car Insurance Rates Are Going Up Again: Allstate and Progressive, two of the nation’s biggest car insurers, say inflation continues to hurt their auto-insurance businesses, and are pushing ahead with additional premium-rate increases for vehicle owners. The two giants, and many other big car insurers, say higher claims costs continue to dent their results, despite slowing inflation. Prices continue to rise for auto parts, they say, and vehicles are taking longer to be repaired than in past years due to shortages of workers. Those delays, in turn, lead to extended rental-car use by policyholders, at the insurers’ expense. Allstate said it raised rates by an average of 8.4% in 28 states in this year’s first three months, on top of increases averaging 11% in last year’s fourth quarter in 38 states, and 14% average increases in the third quarter in 19 states. Progressive said it intends “to be aggressive with raising rates,” and the increases would be on top of premium hikes of more than 13% in 2022 and an additional 4% in the first quarter. The company needs rate increases “of around 10 more points this year to catch up and stay ahead of the trend” of the higher costs in claims for private-passenger vehicles, according to Tricia Griffith, chief executive of Progressive. Source WSJ
Workers Growing Concerned as Pay Losses Tick Higher: By most measures, the U.S. labor market remains quite strong. Though job growth has slowed, it remains robust compared to historic trends. Nominal wage growth is likewise still strong, especially among job switchers. However, workers are growing worried about a potential slowdown, and job loss expectations remained elevated in April. Morning Consult’s Lost Pay and Income Tracker has also bounced higher, rising from 9.5% in March to 10.7% in April. The increase in lost pay seen in recent weeks has been led by higher earners, with the share of U.S. adults from high-income households who experienced a loss of pay or income rising for a second consecutive month as news re-emerges of layoffs in high-paying fields. High-paying tech and financial services companies have been reprioritizing projects and shedding workers to prepare for a lower-growth environment. This indicates that peculiarities in the labor market caused by the pandemic could mean a downturn in this business cycle will hit white-collar workers harder than blue-collar workers. Source MorningConsult
Researchers May Have Discovered a "Cure" for Grey Hair: Ever wondered why your hair turns gray as you age? A team of researchers says it has identified the root cause as trapped stem cells — and that means new tips for naturally fending off grays from your mane could be coming soon. It all starts with a type of stem cell called melanocytes, also known as McSCs, says the study, which was published in the journal Nature. The research team from NYU Grossman School of Medicine was already familiar with melanocytes. They're the main mechanism that produces the pigment melanin, bringing color to your skin and eyes. But over the course of this study, the researchers learned that McSCs actually move between microscopic compartments in your hair follicle. As your hair grows and sheds in cycles, the more McSCs get stuck in one particular compartment called the hair follicle bulge. The jammed cells allow the hair to keep growing, but the hair isn't given its dose of pigmentation. As a result, you go gray. The researchers say that moving the McSCs to their proper location could prevent graying. And anyone scoffing at the vanity of stressing over silver strands can also rejoice: The researchers also say studies like this are putting us one step closer to curing cancer Source NPR
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