Dear Friends,
With the warmer weather setting in at this time of year, we find ourselves eagerly anticipating the arrival of summer. As we begin Memorial Day weekend and look forward to spending time with friends and family, please join us in remembering and honoring those who made the ultimate sacrifice in the service of our nation.
Economy, Geopolitics, and Commodities
1. US Orders for Business Equipment Rebound
Orders placed with US factories for business equipment rose by more than forecast in April, indicating firms are still focused on making long-term investments despite an uncertain outlook and high borrowing costs. The value of core capital goods orders, a proxy for investment in equipment excluding aircraft and military hardware, increased 0.3% last month after falling slightly in March, Commerce Department figures showed Friday. The data aren’t adjusted for inflation. Bookings for all durable goods — items meant to last at least three years — climbed 0.7%, defying expectations for a drop of around that size. Excluding transportation equipment, orders rose 0.4%. The advance in durable goods was broad, including increases in orders motor vehicles, communication equipment, and machinery.
The report suggests businesses remain committed to making long-term investments despite high borrowing costs and elevated input prices. Though firms are cautious about capital spending, many are seeking to enhance productivity and boost capacity amid a reshoring trend. Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s gross domestic product report, advanced 0.4%, starting off the second quarter strong. Before the durables report, the Atlanta Fed’s GDP forecast called for a slight increase in business equipment spending for the second quarter. 2
2. Inflation Eases as Core Prices Post Smallest Increase Since 2021
U.S. inflation eased slightly in April, offering relief to investors and the Federal Reserve after a run of economic data at the start of the year revealed simmering price pressures. The consumer-price index, a gauge for goods and service costs across the U.S. economy, rose 3.4% in April from a year ago, the Labor Department said last Wednesday. Core prices that exclude volatile food and energy items climbed 3.6% annually, the lowest increase since April 2021. Investors cheered the report, which was in line with expectations. It followed three months in which inflation was firmer than anticipated.
Most economists expect the Fed to cut interest rates this year but are divided over when. Because it will likely take another two reports to shore up officials’ confidence that inflation can return to the lower levels that prevailed before the pandemic, many expect the Fed might not be ready to cut interest rates before September. Millions of Americans are still feeling the squeeze of higher prices. Gasoline prices pushed up overall inflation, while consumers continued paying more for housing in April. But year-over-year rent increases slowed from a month earlier, a key sign for economists that a big driver of inflation in recent years is easing. Costs of groceries and vehicles also edged lower in April from the previous month, while price increases for medical care decelerated.1
3. Auto Insurance Rates Are Jumping the Most Since the 1970s
Sales prices for new and used vehicles have been trending lower in recent months and are down 0.4% and 6.9%, respectively, on a 12-month basis, according to Bureau of Labor Statistics data through April. Also, repair and maintenance services costs were flat in April though still up 7.6% from a year ago. Motor vehicle insurance costs, though, continued to soar. The category rose 1.8% in April monthly and was up 22.6% from a year ago, the largest annual increase since 1979, according to Bank of America. In the CPI calculation, auto insurance has a weighting of nearly 3%, so it’s a significant component.
Soaring auto insurance costs have been a principal driver behind inflation over the past year, but there could be relief on the way, according to Bank of America. The bank’s economists see several driving factors behind the run-up in costs to ease in the months ahead, possibly taking some of the heat off a category that has pushed the Federal Reserve to keep up its inflation fight. “The turbocharged increases in motor vehicle insurance premiums are a response to underwriting losses in the industry. Insurers saw losses,” BofA economist Stephen Juneau said in a note. However, he added, “There are signs that many insurers are getting back to profitability.”3
4. Prices at the Pump Are Dropping Just in Time for Memorial Day Weekend
Good news for Americans hitting the road over what could be a record Memorial Day weekend of driving: Prices at the pump are ticking lower again. A slow-but-steady decline pushed the average U.S. cost of regular gasoline to $3.58 a gallon last week, according to federal data, down from $3.67 about a month earlier. The recent figure is roughly in line with prices a year ago and about 5% below the typical pre-Memorial Day cost since 2000, when adjusting for inflation. Regional fuel prices often move independently based on factors such as storms, taxes and refinery maintenance. Over the past month, however, gas costs monitored by federal record-keepers have fallen in every region of the country. Motorists in Las Vegas, the Phoenix area and Sacramento, Calif., are seeing some of the steepest cuts, according to AAA.
The declines come at an opportune moment. Memorial Day marks the unofficial kickoff of the summer road-trip season. AAA expects a record 38.4 million people to travel 50 miles or more by car this weekend. Lower fuel costs are aiding the Federal Reserve’s inflation fight while the central bank mulls if and when to lower interest rates from two-decade highs. Gasoline futures maintained declines this week after the administration said it would tap Northeast fuel reserves to release 1 million barrels of gasoline—a small fraction of one day’s worth of U.S. consumption—to help cap prices. The downshift marks a reversal from earlier this year, when gasoline prices surged faster than their usual annual run-up and propped up inflation.1
5. A Euro-Zone Inflation Hiccup Is Unlikely to Thwart ECB Rate Cut
A probable pickup in euro-zone inflation this month is unlikely to derail the juggernaut of an imminent interest-rate cut by the European Central Bank. Data next Friday will show consumer prices rose 2.5% from a year earlier, up from 2.4% in April, according to the median forecast of 34 economists in a Bloomberg survey. The so-called core measure that policymakers tend to focus on — because it strips out volatile elements such as energy — probably stopped weakening for the first time since July, staying at 2.7%. While both outcomes would signify a lack of progress in the right direction toward the ECB’s 2% target, officials’ consistent signals for a quarter-point rate reduction on June 6 make it unlikely that one month of data will distract them.
President Christine Lagarde, for example, declared this week that “we have inflation under control.” ECB Vice President Luis de Guindos meanwhile said that fluctuations in consumer-price growth are expected, and that a 25 basis-point cut in borrowing costs “looks reasonable.” Even so, if inflation turns out as forecasters anticipate, such a result might underscore the need for vigilance. That’s an approach backed by Bundesbank President Joachim Nagel, one of the hawks of the ECB Governing Council, who favors taking a breather after any move in borrowing costs.2
Financial Markets
1. Nasdaq, S&P 500 Rise After a Rocky Week of Trading
The Nasdaq closed Friday at a fresh record high as gains in chipmaker Nvidia outweighed worries that the Federal Reserve will delay interest rate cuts. The S&P 500 rose 0.7%, closing at 5,304.72, while the Nasdaq Composite advanced 1.1%, ending at 16,920.79. The Dow Jones Industrial Average edged up 4.3 points, or 0.01%, to finish at 39,069.59. Week to date, the S&P 500 inched up just 0.03%. The tech-heavy Nasdaq outperformed, with a gain of 1.41%. Meanwhile, the Dow shed 2.33%, marking its first negative week in five. The benchmark 10-year yield traded at 4.467%, after settling at 4.474% on Thursday. Gold futures for May delivery fell this week to $2,332.50 an ounce, marking their worst weekly percentage decline of the year. Copper and silver also retreated this week.
Nvidia shares climbed around 2.6% Friday as enthusiasm continued over its blockbuster earnings report, pushing the shares above $1,000 for the first time. The bullish sentiment on the AI giant and other tech names powered the market higher, even as concerns the Fed will not lower rates this summer lingered. Several tech names were higher on Friday. Advanced Micro Devices and Intel rose 3.7% and 2.1%, respectively. Meta and Netflix shares also rallied 2.7% and 1.7% each. Their performance helped Nasdaq log its eleventh record close of the year.3
2. Big Tech Moves More AI Spending Abroad
As Big Tech ramps up spending on artificial intelligence, companies are increasingly looking overseas, investing billions of dollars to build out AI infrastructure. So far this year, Microsoft and Amazon have earmarked more than $40 billion combined for investments in AI-related and data center projects worldwide. Broadly, big tech companies are looking to “spread their wings” to international markets, Wedbush analyst Daniel Ives told The Wall Street Journal. “This is an AI arms race as Microsoft, Amazon and others skate to where the puck is going with this tidal wave of spending on the doorstep.”
Microsoft has plans for more than $16 billion in investments over the next several years spread between France, Germany, Japan, Malaysia, Spain and Indonesia. Amazon, meanwhile, has planned infrastructure investments of $15 billion in Japan, $9 billion in Singapore, $5 billion in Mexico, and $1.3 billion in France. The overall growing demand for generative AI, as well as the desire from new ventures and startups to incorporate this functionality into their businesses, has been pushing tech companies to expand their capabilities quickly. Companies “need those data centers full of Nvidia GPUs to be local” due to faster processing times as well as data privacy and security, Luria said. Meanwhile, Google parent company Alphabet has kept most of its AI and data center-related investments confined to the U.S. Wedbush’s Ives expects Alphabet, as well as Meta Platforms, to aggressively expand overseas, following the lead of Microsoft and Amazon, who are known as leaders in cloud computing. Luria said for these companies, expanding their data center capacity is “part of the natural progression of their business.” 2
3. Eli Lilly Boosts Investment in Indiana Plant
Eli Lilly on Friday said it is investing another $5.3 billion in a manufacturing plant in Lebanon, Indiana, to boost supply of its highly popular weight loss drug Zepbound, diabetes treatment Mounjaro and other medicines. Demand for those treatments has far outpaced supply over the past year, spurring shortages in the U.S. and forcing the pharmaceutical giant to invest heavily to scale up its manufacturing. That new commitment brings Eli Lilly’s total investment at the site to $9 billion. That makes it Eli Lilly’s largest manufacturing investment in its nearly 150-year history, the company’s CEO David Ricks said in a statement.
Eli Lilly expects the Lebanon site to start making medicines toward the end of 2026 and scale up operations through 2028. The company first announced its plans to build new Indiana sites in 2022. The plant will specifically increase Eli Lilly’s capacity to manufacture the active ingredient in Zepbound and Mounjaro, called tirzepatide. The company refers to those treatments as incretin drugs, which mimic certain gut hormones to suppress a person’s appetite and regulate blood sugar.3
4. SEC Widens Accessibility of Crypto Investing With Approval of ETFs for Ether
The Securities and Exchange Commission approved the first U.S. exchange-traded funds holding ether, the largest cryptocurrency behind bitcoin, in an about-face that surprised the crypto community. The new funds, known as spot ether ETFs because they buy and sell the digital currency itself, will allow mainstream investors to buy and sell ether as easily as stocks or mutual funds. Ether is the in-house token on the Ethereum blockchain, an open software platform for developers to build and operate crypto applications, much like iOS or Android.
A spokesperson for the SEC said the agency won’t be commenting beyond the approval order. Thursday’s decision paves the way for the eventual trading of ether ETFs, by allowing exchanges to list such products. At least 10 asset managers, including BlackRock and Fidelity Investments, applied to launch the first batch of ether ETFs. Those companies still need approval to start trading their specific funds on the exchanges through a filing called an S-1. The SEC could stall on approving that step. The ruling marks at least a partial retreat from SEC Chair Gary Gensler’s efforts to keep crypto from becoming more ingrained in traditional finance and potentially opens the door for other funds backed by smaller, riskier tokens.1
5. Insurers Are Working to Shore Up the $2 Billion Carbon Offset Market
Data fraud, questionable accounting practices and intensified catastrophes are just some of the issues that have battered the voluntary carbon market. Those misfortunes have helped spur a new line of business: Insurance policies designed to de-risk credits that polluters buy to neutralize their climate impact. Whether insurance can help stabilize an industry under heavy scrutiny remains to be seen, though. Carbon credits are a financial instrument to help channel capital into projects that cut greenhouse gas emissions. Project developers sell credits equal to one ton of carbon dioxide reduced or avoided to polluters who want to cancel out emissions. But some projects — particularly forest projects — have been shown to benefit the climate much less than promised, often because the forests were not at risk of being cut down in the first place
Global demand for offsets last year hit a new record, with polluters buying credits to counterbalance as many as 164 million tons of CO2 emissions, according to market research firm BloombergNEF. Purchases could increase to billions of tons annually and be worth $1.1. trillion by 2050 — as long as investors remain confident, BNEF analysts wrote in a recent research note. Most traditional insurers have steered clear of offering carbon trading coverage, citing concerns about the lack of quality data to assess risks, the impact of an increasingly unstable climate and the fact that many projects are in countries with weak legal systems. To date, buyers and sellers of carbon credits have largely relied on a self-insurance practice known as the “buffer pool,” where project developers put a portion of credits aside to cover unexpected carbon losses. However, the more credits the developers’ channel into the buffer pool, the fewer are left for sales, weighing on project profitability. Insurers say they can provide similar benefits with lower costs. 2
6. Earth-Size Planet Found Orbiting Nearby Star
Astronomers have discovered an Earth-size planet that is showered with so much radiation, its atmosphere eroded away long ago, leaving it bare. Life as we know it can’t exist on this blistering world, but astronomers are interested in it for another reason: For the first time, they may be able to study the geology of a planet outside our solar system.
The newfound exoplanet, named SPECULOOS-3 b, is a rocky planet roughly 55 light-years from Earth. It zips around its host star every 17 hours, but days and nights on the planet are endless. Astronomers suspect the planet is tidally locked to its star, like the moon is to Earth. A single dayside always faces the star, while the nightside is locked in eternal darkness. Telescope observations show that frequent radiation from the exoplanet’s star, a 7 billion-year-old red dwarf about the size of Jupiter, roasts the planet to Venus-like temperatures. So any atmosphere the planet may have had easily escaped into space long ago and left behind an airless, sizzling ball of rock, astronomers reported in the new study, published May 15 in the journal Nature Astronomy. 4
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) www.livescience.com
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Legacy Foundation and LPL Financial do not offer tax advice.
Recent Comments