There's worry brewing that CPI could come in quite a bit stronger than Wall Street is anticipating following a string of better-than-expected economic data. The Cleveland Federal Reserve's own gauge projects a +0.5% increase in the so-called "core" rate, which the Fed prefers because it strips out food and energy. Economists are forecasting a +0.4% increase. Either one would hold the year-over-year core rate at +5.5% or higher.
Investors are also debating the impact of a wider credit squeeze on the economy as a result of fallout from recent banking turmoil. Much of the discussion right now is focused on a highly anticipated report from the US Federal Reserve released yesterday which showed banks tightened lending standards across the board in the first quarter. The so-called "Senior Loan Officer Survey" showed tighter standards and weaker demand for commercial and industrial loans to all sizes of firms.
Bears are quick to remind that historically, when banks tighten lending, higher unemployment always follows, in turn raising the risk of recession. Notably, the report showed that nearly 74% of banks tightened standards for commercial real estate loans while almost 67% tightened standards on nonfarm nonresidential property loans.
That's worrisome for commercial real estate in particular with the sector already under pressure from low office occupancy rates and a significant amount of borrowing that needs to be refinanced over the next 18 months.
Keep in mind, if banks are saddled with big losses from commercial real estate bets, lenders could tighten credit availability even further, in turn deepening any economic downturn. The only economic data out today is the NFIB Small Business Optimism Index.
There are also at least two Fed officials scheduled to speak with investors interested in hearing their thoughts on the latest strong employment data.
Turning to earnings, the top highlights today are Airbnb, Duke Energy, Electronic Arts, GlobalFoundries, Occidental Petroleum , and Rivian.
Also, keep in mind, about 75% of the S&P 500s gains this year have come from the five most heavily weighted stocks in the index Apple, Microsoft, Nvidia, Meta, and Amazon. And those stocks are all done reporting Q1 earnings.
Something else to consider is that about 40% of S&P 500s revenues come from outside the US, which means a weakening US dollar could go a long ways in helping to stabilize growth. Lots of moving pieces to think about.
Buffett Sees Consumer Spending Slowing: Warren Buffett, whose conglomerate is viewed as a barometer for U.S. economic health because of the range of businesses it owns, said something that doesn’t bode well for those believing we will skirt a recession. The “Oracle of Omaha” believes that the extraordinary period of excessive spending on the back of the pandemic stimulus is over, and now many of his businesses are faced with an inventory build-up that they’ll need to get rid of by having sales. Buffett said his businesses had experienced an extreme period where consumers splurged, which led to many managers at his subsidiaries overestimating demand for certain products. It was just a question of getting goods delivered. People bought, and they didn’t wait for sales. The 92-year-old investing icon said he expects to see an earnings decline for many of his businesses in light of an economic slowdown. “In the general economy, the feedback we get is that, I would say, perhaps the majority of our businesses will actually report lower earnings this year than last year,” he said. Source CNBC
Young Adults Prefer TiKToK and Instagram Over Facebook: Researchers and data analysts say that Facebook is still the world's overall leader with +3 billion people checking it each month. That’s more than a third of the world’s population. And 2 billion logging in every day. Interestingly only about 28% of US Facebook users are between 18 and 34 years old, compared with nearly 46% for TikTok and 42% for Instagram. Source Fortune
Why Labor Shortages Could be Here to Stay: Even if the job market cools off labor shortages might be with us for the long term. Declining fertility rates, and increasing life expectancy are expected to lead to a drop in working-age populations across all G20 countries, according to projections cited in a recent report from Moody's Investors Service. Korea, Germany, and the US are expected to see the sharpest declines over the next decade, Moody's states. So-called "prime-age" workers are indeed working. The labor force participation rate among those aged 25–53 is now at 83.3%, slightly higher than where it was in February 2020. But overall labor force participation, that is the share of the total population either working or looking for work is still slightly lower than where it was then. That's partly to do with more older workers retiring, as the percentage of Americans age 55 and over has doubled over the last 20 years. Source Axios
Fed Says Banks are Well-Positioned but Flags Commercial Real Estate Risks: In its semi-annual report on financial stability, the U.S. central bank said overall funding risks for banks remained low and firms still have ample liquidity. Furthermore, additional policy efforts by U.S. bank regulators following the abrupt collapses of Silicon Valley Bank and Signature Bank in March should continue to backstop the system if further stresses arise, the Fed said. While the central bank noted there were spillover concerns following the failures of Santa Clara, California-based SVB and New York-based Signature, it maintained that the issues that sank those regional banks do not appear broadly across the banking sector, calling them "outliers" in terms of heavy reliance on uninsured deposits. Those firms, as well as First Republic Bank, which was closed by regulators earlier this month and sold to JP Morgan Chase, also were grappling with large amounts of unrealized losses spurred by rapidly rising interest rates. Beyond banks, the Fed said pressures on various market sectors remained within historical norms. However, it noted that valuations on commercial real estate remain high, which suggests there could be a "sizable" correction in property values should telework trends remain strong. The Fed found that banks hold about 60% of commercial real estate loans, with two-thirds of those at smaller lenders with less than $100 billion in assets. Source Reuters
America’s Factory Boom Drives Sales Surge for Excavators, Steel, and Trucks: Manufacturers of construction equipment, trucks, building supplies and industrial software are still ringing up sales, despite slowdowns in other parts of the U.S. economy. A backlog of orders stemming from supply-chain bottlenecks during the pandemic and higher demand from new factories under construction have boosted manufacturing companies, helping offset the effects of rising interest rates and weakening U.S. economic growth. U.S. construction spending in March rose by an adjusted rate of 0.3% from February, according to the U.S. Census Bureau. New factories are driving demand for construction materials, including steel, as well as the systems and equipment needed to operate the plants once they are completed. Caterpillar’s sales of machinery and engines from North America rose +32% in the first quarter of 2023 from the same period a year earlier. Companies’ pandemic supply-chain problems left customers to endure long waits for orders, or postpone purchases or projects. Manufacturing executives said that demand didn’t vanish and is now providing momentum for sales as the availability of parts improved in recent quarters. Source WSJ
Family Offices Plan to Load Up on Stocks, Private Credit: At a time when many investors are pulling back, family offices are moving into “risk on” mode, with plans to buy more stocks and alternative investments this year, according to a new survey. Nearly half (48%) of family offices plan to purchase stocks this year, according to the Goldman 2023 Family Office Investment Insight Report. The report, based on a survey of 166 family offices around the world with at least $500 million in assets, also found that family offices plan to put their large cash piles to work as inflation, rising rates and falling stocks create new opportunities. Currently, the family offices surveyed had nearly half (44%) of their holdings in fixed income and alternative investments, with 26% in private equity, 9% in real estate and infrastructure, 6% in hedge funds 3% in private credit, and 5% in commodities and other investments. Source CNBC
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