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Economy, Geopolitics, and Commodities
1. Hot Inflation Report Derails Case for Fed June Rate Cut
Stubborn inflation pressures persisted in March, derailing the case for the Federal Reserve to begin reducing interest rates in June and raising questions over whether it can deliver cuts this year without signs of an economic slowdown. The consumer-price index, a measure of goods and services prices across the economy, rose 3.5% in March from a year earlier, the Labor Department said Wednesday. That was a touch higher than economists had forecast and a pickup from February’s 3.2%. So-called core prices, which exclude volatile food and energy categories, also rose more than expected on a monthly and annual basis. Services prices, excluding energy, jumped 0.5% and were up 5.4% from a year ago. A relatively new computation the markets are following which takes core services and subtracts out housing — it has come to be known as “supercore” and is watched closely by the Fed — surged at an annualized pace of 7.2% and rose 8.2% on a three-month annualized basis.
Wednesday’s report had been hotly anticipated because Fed leaders had been willing to play down stronger-than-anticipated inflation readings in January and February as reflecting potential seasonal quirks. But a third straight month of above-expectations inflation data erodes that story and could lead Fed officials to postpone anticipated rate cuts until July or later. Fed officials have been optimistic about achieving a so-called soft landing in which inflation slows without a sharp downturn in economic activity. To do that, some officials wanted to cut rates pre-emptively before the economy weakens notably. The latest report sets back that effort by depriving them of a credible justification for cutting rates, and it could prompt them to hold rates at their current level, the highest in 23 years, until they see more cracks in the economy. 1
2. US Producer Prices Rise But Show Some Relief in Key Categories
US producer prices increased in March from a year earlier by the most in 11 months, though certain categories that feed into the Federal Reserve’s preferred inflation gauge were more muted. The producer price index for final demand rose 2.1% from March 2023, Labor Department data showed Thursday. On a monthly basis, the PPI increased a less-than-forecast 0.2% after a sharp advance in February. For investors and Fed officials, the details offer some relief after a report Wednesday showed faster-than-expected consumer-price growth. Several categories in the PPI report that are used to inform the Fed’s preferred inflation measure — the personal consumption expenditures price gauge — such as health care and portfolio management, came in softer.
The PPI data showed a third straight increase in the cost of services, which is proving to be the main reason why inflation has been stubborn, prompting traders to dial back expectations on how soon the Fed will lower interest rates. More broadly, services costs rose 0.3%, fueled in part by higher airfares. Goods prices edged lower. The March reading of the PCE is due later this month. New York Fed President John Williams said in prepared remarks Thursday the central bank has made “tremendous progress” toward better balance on its inflation and employment goals, but acknowledged policymakers are not yet done.2
3. ECB Signals It’s Moving Closer to a Cut but Keeps Rates Steady
The European Central Bank gave the clearest indication yet that it could cut interest rates in June, opening a new phase for financial markets and signaling a possible divergence with the Federal Reserve, whose path to monetary easing is becoming rockier. The ECB held its key interest rate at a record-high 4% on Thursday for a fifth straight policy meeting. But at a news conference, ECB President Christine Lagarde signaled growing confidence that cooling inflation in the 20-nation eurozone would enable the central bank to cut rates at its next policy meeting on June 6.
That could provide a boost to the struggling eurozone economy and potentially put the ECB ahead of the Fed, which hasn’t signaled a date to start cutting rates. Like the ECB, the Fed has said it would base future interest-rate decisions on incoming economic data. After an unexpectedly high inflation reading in the U.S. on Wednesday, markets pushed back expectations of an imminent rate cut there. That shift reverberated in Europe, where investors are betting that the ECB and other major central banks won’t diverge much from the Federal Reserve. Lagarde stressed that the ECB could cut rates before its U.S. counterpart if needed. “We are data-dependent, we are not Fed-dependent,” Lagarde said. She said that a few ECB policymakers had already been willing to countenance a rate cut this month. Interest-rate cuts are in play because slowing price pressures mechanically increase inflation-adjusted interest rates. That means monetary policy could become too tight if central banks do nothing. An early ECB rate cut would be historically unusual for a central bank that has previously been slow to change direction. Any divergence between the Fed and ECB would ripple through financial markets and the world economy. Fed policy moves have an outsize influence on a world economy that relies heavily on the U.S. dollar. That means that while the ECB might be able to start cutting rates before the Fed, there might be limits to how far it can diverge from the U.S. central bank over time.2
4. Oil Rises to October High as Israel Prepares for Iranian Attack
Oil jumped to the highest price since October as Israel braced for a possible attack from Iran, a development that would threaten major disruptions in a region that accounts for a third of the world’s crude output. An assault is expected to come as soon as the next 48 hours, which would mark a significant widening of the conflict that started when Hamas attacked Israel in October. Global benchmark Brent surged as much as 2.7% to top $92 a barrel, a level last reached during the early days of the war. US benchmark West Texas Intermediate climbed as much as 3.1% to surpass $87.
Oil has surged about 19% this year as the Middle East conflict bolsters a market shaped by supply restrictions and stronger-than-expected demand. The escalating geopolitical tensions — also including attacks on Russian energy infrastructure by Ukraine — have spurred bullish activity in the oil options market. There has been elevated buying of call options — which profit when prices rise — in recent days, with implied volatility jumping to a two-month high. The options on Brent are still trading at a premium over bearish puts.2
5. Mortgage Rates Near 7% Again
Mortgage rates again rose to nearly 7%, a key psychological threshold that threatens the housing revival that many had hoped for this year. Mortgage rates had eased some at the start of the year, helping to spur some activity in the sharply slowed-down market. But shifts in expectations for the Federal Reserve have pushed rates back toward 7%, a level they haven’t reached since December.
The average rate on the standard 30-year fixed mortgage rose to 6.88%, according to a survey of lenders released Thursday by mortgage-finance giant Freddie Mac. That is up from 6.82% a week earlier. A separate measure of average mortgage rates, from the Mortgage Bankers Association, rose to 7% this week. Hopes for relief are fading this week. Unexpectedly hot inflation data released Wednesday cast doubt on projections that the Fed will soon cut interest rates from the highest level in decades. Mortgage rates aren’t directly tied to those moves but tend to loosely follow the 10-year Treasury yield, which posted its largest one-day gain in more than 18 months Wednesday. Higher mortgage rates have put homeownership out of reach for many Americans. A difference of a few percentage points can add hundreds of thousands of dollars in interest over the life of a loan. Home prices have hit record highs, and the cost of insurance premiums, property taxes and maintenance have also jumped. Workarounds that borrowers use when rates are high haven’t worked as well as in the past.1
Financial Markets
1. Indexes Finish Week With Losses as Bank Earnings Land
Stocks sold off Friday as inflation and geopolitical worries once again dented investor sentiment on Wall Street. A broad decline in major bank shares also weighed on the market. The Dow Jones Industrial Average slid 475.84 points, or 1.24%. The S&P 500 tumbled 1.46%, while the Nasdaq Composite pulled back by 1.62%. At one point in the trading session, the Dow was down by nearly 582 points, or 1.51%. The S&P 500 slid as much as 1.75%. Week to date, the broad market index dropped nearly 1.6%, and the 30-stock Dow fell 2.4%. Meanwhile, the tech-heavy Nasdaq is 0.5% lower for the week.
JPMorgan Chase shares declined more than 6% after the banking giant posted its first-quarter results. The bank said net interest income, a key measure of what it makes through lending activities, could be a little short of what Wall Street analysts are expecting in 2024. CEO Jamie Dimon also warned about persistent inflationary pressures weighing on the economy. Wells Fargo slipped 0.4% after reporting its latest quarterly figures. Citigroup dropped 1.7% despite posting a revenue beat. Oil prices continued their rise on reports that Israel is preparing for a direct attack by Iran this weekend, in what would be the biggest escalation of tensions in the region since the outbreak of the Israel-Hamas war last October. U.S. crude settled at $85.66 a barrel after rising above $87.That, coupled with fresh U.S. imports data, added fuel to inflation concerns that have put pressure on the market.4
2. Banks Expected To Report Largest Decline
The Financials sector will be a focus for the market during the next two weeks, as 50% of the S&P 500 companies that are scheduled to report earnings for the first quarter over this period are part of this sector. Companies in the Financial sector that are expected to report earnings during these two weeks include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. The Financials sector is predicted to report the sixth highest (year-over-year) earnings growth rate of all eleven sectors for Q1 at 0.7%.
At the industry level, three of the five industries in the sector are expected to report year-over-year earnings growth, led by the Insurance industry at 37%. This industry is also expected to be the largest contributor to year-over-year earnings for the sector. If the Insurance industry were excluded, the Financials sector would be expected to report a (year-over-year) decline in earnings of -6.0% rather than a year-over-year increase in earnings of 0.7%. At the sub-industry level, all five sub-industries are expected to report year-over-year earnings growth. Four of these sub-industries are predicted to report double-digit earnings growth: Property & Casualty Insurance (87%), Reinsurance (62%), Life & Health Insurance (12%), and Multi-line Insurance (12%).
On the other hand, two industries in the sector are expected to report a year-over-year decline in earnings, led by the Banks industry at -18%. This industry is also expected to be the largest detractor to year-over-year earnings growth for the sector. If the Banks industry were excluded, the estimated earnings growth rate for the Financials sector would increase to 14.2% from 0.7%. At the sub-industry level, both the Diversified Banks (-16%) and Regional Banks (-28%) sub-industries are expected to report year-over-year declines in earnings.3
3. JPMorgan Stock Slides, Despite Jump in Earnings
JPMorgan Chase’s first-quarter earnings rose 6%, but the bank projected muted growth for the rest of the year and said higher interest rates were starting to weigh. Its shares (JPM) were down over 5% in recent trading, on pace for their worst day in over a year.
Here’s a rundown of the numbers:
Profit rose to $13.42 billion, or $4.44 a share, from $12.62 billion a year earlier. Analysts had expected $4.17 per share. Revenue rose 9% to $41.93 billion. Analysts had expected $41.69 billion. Net interest income, the difference between what it earns on loans and securities minus what it pays depositors, rose 11% to $23.08 billion. However, it was a decline compared to last quarter. Non-interest income—the other half of its revenue, representing fees the bank collects from its businesses—rose 7% to $18.85 billion. In the consumer bank, revenue rose 7%. In the corporate and investment bank, revenue was basically flat on the prior year. The investment bank reported a 21% jump in fees on the back of higher capital-market activity. The bank took a special charge of $725 million to pay the Federal Deposit Insurance Corp. over 2023’s bank failures, on top of last quarter’s $2.9 billion charge.1
4. Delta Forecasts Quarterly Earnings Ahead of Expectations
Delta Air Lines swung to a profit in the first quarter, and CEO Ed Bastian said bookings for both leisure and business travel are strong as the peak travel season approaches, despite persistent inflation. “Consumers continue to prioritize travel as a discretionary investment in themselves,” Bastian said in an interview. Delta forecast second-quarter earnings of $2.20 to $2.50 per share, while analysts forecast between $2.23 per share on average, according to LSEG, formerly known as Refinitiv. It said revenue in the current period could rise as much as 7%, ahead of analysts’ estimates. Delta also reiterated its full year forecast for $6 to $7 a share and free cash flow of between $3 billion and $4 billion.
Business travel improved in the last quarter and solid demand is likely to continue, executives said, citing 14% growth in corporate travel sales. They called out the technology, consumer, and financial services sectors as particularly strong. Delta has slowed hiring, like other carriers, after a massive spree in the wake of the pandemic and is focusing more on efficiency. Bastian told CNBC that the company’s headcount will likely be up low single digits this year compared with 2023. Here’s how the company performed in the three months ended March 31, compared with Wall Street expectations based on consensus estimates from LSEG: Adjusted earnings per share: 45 cents vs 36 cents expected. Adjusted revenue: $12.56 billion vs $12.59 billion expected.4
5. Apple Signal of AI Intent Unleashes $112 Billion Stock Surge
The stock market has punished Apple Inc. this year for failing to offer a vision of where its future growth will come from. The shares caught a bid Thursday after the tech giant took a step toward providing an answer. Apple’s decision to overhaul its Mac computer line to focus on artificial intelligence, as reported by Bloomberg, struck a chord with investors, sending the stock up 4.3% and adding $112 billion in value in its best performance in nearly a year.
“Any announcement that pushes AI into consumer hardware could be very beneficial for Apple,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “However, the impact is yet to be determined.” That will be key for assessing whether this latest rally can be sustained. Before Thursday’s announcement, the stock was down 15% from its record high set in December, wiping out more than $460 billion in market value. Trading close to its cheapest level in about a year, bargain-hunters clearly could justify taking a chance on Apple’s latest stab at AI relevance. Sustaining this momentum, however, will depend on Apple’s ability to deliver on the promise of growth. For the Cupertino, California-based tech giant, that likely means getting AI into the iPhone. 2
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.factset.com
(4) www.cnbc.com
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