Dear Friends,
Last Wednesday, the Federal Open Market Committee announced the interest-rate decision and monetary policy for their meeting in May. The market reacted positively along with more companies releasing their earnings. The market had a decent rebound in early May after the pullback in April. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. Key Takeaways on Fed Meeting
Here are the key takeaways from the Federal Open Market Committee’s interest-rate decision and Federal Reserve Chair Jerome Powell’s news conference on May 1, 2024.
The FOMC kept rates unchanged for a sixth straight meeting. Powell said it will take longer than expected to become confident about returning inflation to the Fed’s 2% goal, essentially ruling out a rate cut in the near term. “We can be patient,” he said. Importantly, his comments seemed to close the door on a rate hike as well. Monetary policy is restrictive now and over time sufficiently restrictive to return inflation to target, Powell said. He declined to estimate how likely it is there will be cuts this year and added that policy needs more time to work. The data will be the key to when cuts do happen, the chair said.
The FOMC is still aiming for a soft landing, saying risks to achieving employment and inflation goals “have moved toward better balance over the past year.” Powell said that, with inflation having fallen over the year, there is now a greater focus on the full-employment mandate. He said the Fed doesn’t target wages. The Fed announced that it will slow its pace of quantitative tightening beginning June 1, lowering the cap on the amount of Treasury securities rolling off the balance sheet by more than half, to $25 billion each month from $60 billion. Officials maintained the pace of runoff for mortgage-backed securities at a maximum of $35 billion a month. Powell said there is no signal here on policy. 2
2. U.S. Jobs Growth Set to Slow
U.S. jobs growth could stall in the second half of 2024, with signs of a slowing labor market, according to monthly gauge of employment trends. The Conference Board’s employment trends index fell to 111.25 in April from a downwardly revised 112.16 in March, the private-research group said on May 6th. “The labor market is beginning to show signs of cooling following a period of very strong growth since the pandemic recession,” said Will Baltrus, associate economist at The Conference Board.
However, substantial job losses are unlikely to occur over the coming months, as employers are still facing labor shortages, Baltrus said. The reading comes after Labor Department figures published last week that showed the U.S. added 175,000 more jobs in April, fewer than in March, with the unemployment rate ticking up to 3.9% from 3.8% in the prior month. The Employment Trends Index is a leading composite index for employment that aggregates eight indicators. When the index increases, employment is likely to increase as well, while turning points in the index suggest a change in the number of jobs is likely to occur in the short term. Although the index has been on a downward trajectory since March 2022, the index is elevated by historic levels, suggesting a slowdown in growth to come. Three of the eight components used for the overall index drove the downward reading, including a higher percentage of respondents saying jobs were hard to get.1
3. Bailey Signals BOE May Cut Rates More Quickly Than Expected
The Bank of England sent its clearest signal yet that it was closing in on interest rate cuts, with Governor Andrew Bailey indicating markets were underpricing the pace of easing in the months ahead. The BOE governor made his comments after the UK central bank voted 7-2 to keep the base interest rate at 5.25%, a decision announced Thursday in London. Notably, Deputy Governor Dave Ramsden joined external member Swati Dhingra in calling for an immediate cut, indicating support within the bank to move rates off a 16-year high. The other seven members of the Monetary Policy Committee preferred no change, saying they needed more evidence that inflation will be subdued.
Bailey told a news briefing after the decision that a change as soon as the bank’s next meeting on June 20 “is neither ruled out nor a fait accompli,” highlighting the importance of two rounds of inflation and wage data expected before then. But it was his remarks on markets that will draw the most attention since the governor has in the past expressed reluctance to directly comment on investor expectations for future rates. “It’s likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates,” Bailey said. Markets reacted cautiously to the BOE’s actions. Traders priced a 50% possibility for the first 25 basis-point cut to come next month and continued to fully price in a cut by August. Markets now imply a total of 59 basis points of cuts through 2024, compared to 54 basis points before.2
4. Renters’ Hopes of Being Able to Buy a Home Have Fallen to a Record Low
The dream of home ownership has gotten even further away for renters, with higher housing costs and elevated interest rates standing in the way of the American housing dream, according to a New York Federal Reserve survey released Monday. The share of renters as of February who possess hopes of “residential mobility,” or the belief from renters that they one day will be able to afford a home, fell to a record low 13.4% in the central bank’s annual housing survey for 2024. That’s down from 15% in 2023 and well off the 20.8% series high back in 2014.
Pessimism about prospects comes amid a confluence of factors conspiring against the likelihood of renters being able to transition to home ownership. For one, some 74.2% of renters viewed obtaining a mortgage as somewhat or very difficult, which the New York Fed said has “deteriorated substantially” from the 66.5% level in 2023 and 63.1% in 2022. Moreover, mortgage rates have remained high by historical standards. A 30-year fixed-rate mortgage now carries an average 7.22% borrowing rate, the highest since late November 2023, according to Freddie Mac. Housing affordability has improved little, with the median price in February at $388,700, the highest since November, according to the National Association of Realtors. The NAR’s housing affordability index was at 103 in February, down slightly from January but still at elevated levels with average monthly housing payments at $2,040. Survey respondents expect housing prices to increase 5.1% over the next year, nearly double the 2.6% expected rate in February 2023 and above the pre-pandemic mean of 4.2%. Despite prospects for the Fed to cut interest rates before the end of 2024, respondents think mortgage rates are only going to go higher. The outlook for a year from now is that borrowing costs will be 8.7%, and 9.7% in three years, both survey records.4
5. BOJ’s Policy Board Becoming More Concerned About Effects of Weaker Yen
The Bank of Japan’s board is becoming more concerned about the inflation outlook as a sharply weakened yen threatens to drive up import prices, a summary of its latest meeting showed. “While the yen’s depreciation is likely to push down the economy in the short run through price rises driven by cost-push factors, it could push up underlying inflation in the medium to long run” through increases in inbound spending and domestic production, one of the BOJ’s nine policy board members said at the meeting held on April 25 and 26. The central bank maintained its target for the overnight call rate in the 0% to 0.1% range in April following its decision to end negative interest rates in March.
The BOJ’s summary of opinions, released Thursday, quoted one member as saying the central bank could speed up the pace of rate increases if underlying inflation grows faster than its projections due to a weak yen. In late April, the yen weakened to a three-decade low of around 160 to the dollar, which likely triggered yen-buying intervention by the Japanese government. Ministry of Finance data released Thursday showed that foreign reserves declined 0.9% from a month earlier to $1.279 trillion at the end of April. Analysts say the decline in foreign-currency reserves suggests that the government conducted currency intervention, although Japanese officials haven’t confirmed this. The yen is trading around 155.50 per dollar on Thursday morning in Tokyo.2
Financial Markets
1. Indexes Book Weekly Gains and Extend May Rise
The Dow Jones Industrial Average rose on Friday, wrapping an eighth consecutive winning session and registering its best week of 2024. The 30-stock index added 125.08 points, or 0.32%. The S&P 500 climbed 0.16%, while the Nasdaq Composite inched lower by 0.03%. Treasury yields inched upward, finishing the week at 4.503%. Investors’ more-optimistic outlook on inflation has taken pressure off the bond market. Gold rose nearly 3% this week, settling Friday above $2,367 a troy ounce. Copper advanced for a seventh straight week.
Stocks have reversed April’s declines as Wall Street has grown more confident that the Federal Reserve will begin cutting rates this year. Investors will rake over April’s inflation figures next week. 3M was one of the Dow’s best performers, as shares of the consumer products manufacturer rose about 1.6% on the back of an upgrade from HSBC. Consumer sentiment data released Friday morning reflected a big uptick in inflation expectations, initially throwing some cold water on the market. The preliminary May reading for the University of Michigan’s consumer sentiment index came in at 67.4, far below a Dow Jones estimate of 76 and marking its lowest reading in about six months.3
2. Earnings Summary for Q2 2024
Given concerns in the market about a possible economic slowdown or recession, have analysts lowered EPS estimates more than normal for S&P 500 companies for the second quarter? The answer is no. During April, analysts actually increased EPS estimates for the second quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all the companies in the index) increased by 0.7% (to $59.64 from $59.23) from March 31 to April 30.
In a typical quarter, analysts usually reduce earnings estimates during the first month of a quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.9%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.8%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.5%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.8%. In fact, the second quarter marked the first time that the bottom-up EPS estimate increased during the first month of a quarter since Q4 2021 (+0.3%). At the sector level, seven of the eleven sectors witnessed an increase in their bottom-up EPS estimate for Q2 2024 from March 31 to April 30, led by the Energy (+8.6%) sector. On the other hand, four sectors recorded a decrease in their bottom-up EPS estimate for Q2 2024 during this period, led by the Industrials (-2.6%) sector.3
3. Buybacks Are Back: Corporate America Is on a Spending Spree
U.S. companies are feeling good about their prospects and spending like they mean it. The first-quarter earnings season is turning out better than many Wall Street forecasters had expected. At the same time, companies are stepping up repurchases of their own shares, which is giving a resurgent stock market an extra boost. S&P 500 companies that have reported first-quarter results as of Monday have disclosed buying back $181.2 billion of their shares during the period, according to data compiled by Birinyi Associates. That is up 16% from the year-ago quarter. The pace of purchases has been brisker than usual for nine straight weeks, BofA Securities said Wednesday in a research note.
Investors are taking the increase in buybacks as a sign of rising confidence among executives, despite persistent fears that the economy could weaken or that interest rates will stay high for longer than hoped. Buybacks are popular among investors because they lower the number of shares outstanding, boosting a company’s per-share earnings. Meta stock surged 23%, its best day in nearly a decade, after it unveiled a $50 billion buyback plan in February. Share repurchases are a relatively flexible use of cash. They can typically take place at a company’s discretion, without a fixed deadline. Other uses of cash, such as investing in a new factory or paying out a regular dividend, are much harder to stop if the economy sours. Investors usually owe taxes on dividend payments they receive. Large repurchases can make stocks more attractive, but some investors warn they aren’t a reason for buying on their own. Buybacks can signal a slowing business, as fast-growing companies often invest their cash back into expanding their operations.2
4. Microsoft to Invest Over $3 Billion to Build AI in Wisconsin
President Biden hailed Microsoft’s decision to invest billions of dollars on artificial intelligence in Wisconsin, the latest stop in a global spending spree by the tech giant to build AI infrastructure and calm fears about the powerful technology. The announcement is the latest in a series of large investments Microsoft has unveiled in the U.S., Europe and Asia to expand the reach of its AI network.
Microsoft said the new site would initially create 2,300 construction jobs and eventually as many as 2,000 data-center jobs. Microsoft said it is also investing in a new AI lab at the University of Wisconsin Milwaukee campus to train workers to use AI technology. As tech titans tout the benefits of generative AI and invest unprecedented amounts in the technology, they are facing public fears that AI will eventually destroy jobs. Since the launch of OpenAI’s ChatGPT in 2022, demand for AI software and the infrastructure that powers it has exploded. However, data centers—many powered by expensive chips made by Nvidia—have struggled to keep up with demand. Microsoft, Amazon.com, Google parent Alphabet and Meta Platforms have each committed to spending tens of billions of dollars in the coming year to build out AI infrastructure. The amount of data-center space in the U.S. grew 26% last year, according to real-estate firm CBRE, and a record amount was under construction. In recent months, the company has announced commitments to invest around $3.4 billion toward AI and infrastructure projects in Germany, $2.9 billion in Japan and $2.2 billion in Malaysia. It also announced it would invest $1.5 billion into United Arab Emirates-based AI company G42.2
5. Astrazeneca To Withdraw COVID Vaccine Worldwide
Pharmaceutical giant AstraZeneca on Wednesday said it planned to withdraw its Covid-19 vaccine as demand for it has declined. Demand for AstraZeneca’s Vaxzevria vaccine began tapering off as new vaccines tailored to specific Covid variants have emerged, the pharmaceutical company said in a statement. AstraZeneca said it would now work with regulators and partners to establish a path forward. AstraZeneca in March 2024 voluntarily withdrew its marketing authorization in the European Union, which previously allowed it to promote the vaccine. The Vaxzevria vaccine was developed with the University of Oxford and was one of the first shots against Covid-19 to hit the market during the coronavirus pandemic, with millions of people around the world receiving it.
The U.K. was the first country to roll out the shot in January 2021, around a year after the World Health Organization first characterized the Covid-19 outbreak as a pandemic. AstraZeneca’s vaccine, despite confirmation of its safety and efficacy, has at times been met with concerns about side effects after a small number of people began to experience blood clots linked to the vaccine. A U.K. study found that blood clots were “rare” but could be “devastating.” The pharmaceutical maker on Wednesday said it was “incredibly proud” of the vaccine’s role during the pandemic. 4
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.factset.com
(4) www.cnbc.com
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Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
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