Dear Friends,
Financial market fears of a potential U.S. credit default were lifted as President Biden signed into law bipartisan legislation that suspended the $31.4 trillion debt ceiling, narrowly avoiding an unprecedented U.S. default. While this brought some relief, next week will be critical in setting the tone for the near future as Tuesday brings the latest release of the consumer price index (CPI), followed by the Fed’s rate announcements on Wednesday. Find out more about what has been driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. With Biden’s Signature, Debt-Ceiling Saga Is a Wrap
President Biden signed into law bipartisan legislation that suspends the $31.4 trillion debt ceiling, narrowly avoiding an unprecedented U.S. default that could have pushed the economy into a recession and touched off a financial crisis.
The president signed the bill on last Saturday afternoon, just two days before the government was set to run out of money to pay all of its bills, according to Treasury Department estimates.
The legislation’s enactment caps weeks of tense negotiations between the White House and House Republicans that were spurred by GOP lawmakers’ demands to cut spending in exchange for raising the nation’s borrowing limit.
The Fiscal Responsibility Act suspends the debt ceiling through Jan. 1, 2025, pushing the issue beyond the 2024 elections, in exchange for cuts in unspecified domestic programs and a 3% cap on increases for military spending in fiscal 2024. It provides $45 billion for a recently created program expanding coverage for veterans exposed to toxic burn pits, formally ends a three-year freeze on student-loan payments, expedites large-scale energy and infrastructure projects and raises to 54 the age at which able-bodied, low-income adults without dependents must work to receive food aid.
“No one got everything they wanted but the American people got what they needed,” Biden said Friday in his first major address from the Oval Office as president. “We averted an economic crisis, an economic collapse.”
2. World Bank Brightens View of Global Growth This Year
The World Bank sees better global economic growth than previously estimated in 2023, thanks to resilient U.S. consumer spending and China’s faster-than-expected reopening in the early part of the year. The bank still expects slowing growth in the second half of this year and a muted expansion into next year, according to its forecast released Tuesday. It warned that stubbornly high inflation and interest-rate increases are weighing on economic activity around the world, particularly in developing countries. The bank now projects the world’s economy will grow 2.1% this year, up from the 1.7% pace it forecast in January. The new estimate still marks a slowdown from last year’s 3.1% expansion. The somewhat improved 2023 outlook is consistent with other data showing the U.S. and much of Europe have so far avoided a recession that many forecasters expected heading into 2023.
Better-than-expected economic performances at the start of the year have helped keep inflation stubbornly high in many advanced economies. As a result, policymakers in the U.S. and other rich nations have continued to raise interest rates to tame inflation. The World Bank says that the impact is felt particularly acutely in many developing nations. For many lower-income countries, higher rates are crimping growth, slowing investment, and intensifying the risk of financial crises, the bank said.
3. Bank of Canada Lifts Rates to 22-Year High, Ending Four-Month Pause
The Bank of Canada ended on Wednesday a short-lived pause in interest-rate increases and lifted rates by a quarter-point on stronger-than-expected consumer spending and mounting worries that inflation could get stuck at elevated levels.
The Bank of Canada raised its target for the overnight rate to 4.75% from 4.50%, marking a 22-year high. In January, the Bank of Canada was the first major developed-world central bank to declare a timeout on rate increases—after an aggressive campaign that raised borrowing costs by 4.25 percentage points over a 10-month period—to assess the impact of sharply higher rates on the economy. The belief among central bank officials was that economic activity and inflation would decelerate through 2023.
The economic data have said otherwise, forcing Canada’s central bank and its global peers to rethink how high interest rates need to go to cool inflation. Some economists believe the Bank of Canada isn’t finished with rate increases and anticipate another quarter-point lift when senior officials deliberate in July. While inflation in Canada has eased from a peak of over 8% from a year ago, it accelerated in April to 4.4% from 4.3%. The central bank sets an interest-rate policy to achieve and maintain 2% inflation. Canada’s gross domestic product expanded at a strong 3.1% annual rate in the first quarter, or well above Bank of Canada expectations for 2.3% growth, on robust consumer spending, including on interest-sensitive items like housing.
The Bank of Canada’s decision to lift rates came a day after Australia’s central bank announced its 12th rate rise in just over a year. Federal Reserve officials have signaled they are increasingly likely to hold interest rates steady following their June 13-14 meeting before preparing to raise them again later this summer.
4. U.S. Oil Enters World’s Most Important Oil Benchmark
The energy world has for decades looked to oil rigs 100 miles off the coast of Scotland’s northernmost islands to help set the price of global crude. All eyes are now turning to Texas instead.
Starting with deliveries that arrive Thursday, a type of U.S. oil will factor into calculations for the price of Brent crude. It is the first time that a non-European grade will be used to help compute the global pricing standard, a sign of how energy markets have been reshaped in America’s image.
Brent is an international benchmark that underpins prices for much of the crude and liquefied natural gas that trades globally each day, tying Nigerian oil wells and Chinese refiners to the flickering screens of Wall Street. It can make or break fortunes for hedge funds, dictate wartime revenue for the Kremlin and determine fuel costs for businesses and drivers around the world.
Analysts said the change, years in the making, is an acknowledgment of how the shale revolution made the U.S. an energy superpower. Innovations in drilling technology primed the country to become an export juggernaut alongside Russia and Saudi Arabia.
The U.S. exported about 134,000 barrels of crude a day 10 years ago, according to the Energy Information Administration, nearly the capacity of California’s seventh-largest refinery now. Daily exports in the first three months of this year averaged 4.1 million barrels, roughly more than the consumption of Japan.
Some analysts believe the addition of cheaper American barrels is likely to lower average prices overseas and boost earnings for U.S. exporters. With more oil underpinning Brent, its value should become less vulnerable to squeezes or manipulation.
5. Sector PMI Focus Switches to Services
The JPMorgan Global Manufacturing Purchasing Managers’ Index™ (PMI™) compiled by S&P Global, registered 49.6 in May, unchanged for a third successive month and indicating a marginal deterioration of business conditions. Conditions have now worsened for nine straight months.
From the demand side, new orders received by manufacturers fell worldwide for an eleventh straight month in May, reversing the continual demand increase seen over the prior two years during the height of the pandemic. Backlogs of uncompleted orders are consequently also falling, down in May for an eleventh successive month, as a lack of new sales means order books are being steadily depleted. This contrasts with an unprecedented buildup of backlogs of work at the height of the pandemic, caused by surging demand at a time of disrupted supply chains.
Recent PMI data have shown a strong shift of consumer spending and growth away from goods towards services, with tourism and recreation in particular benefiting from post-pandemic freedoms. Falling demand, combined with inventory reduction policies, has meanwhile subdued the goods-producing sector, constraining growth again in May and suppressing goods price inflation. However, while demand has switched from goods to services, so have supply constraints, meaning service sector inflation is showing stubborn persistence. May’s services PMIs on the 5th of June, and the detailed sector PMI data on 6th June, have provided important insights into monetary policy developments.
6. Virginia Takes on Duke in Best-of-Three Super Regional
The Virginia Cavaliers baseball team is competing in their 8th baseball super regional in the past 15 years. They will be hosting their ACC rivals in the Duke Blue Devils in a best of three series beginning Friday at 12 p.m. at Davenport Field.
These teams met back in April in Charlottesville with the Blue Devils taking two of three from the Cavaliers. This UVA team enters the supers with momentum with their dominate performance in the regionals. They like their chances to win the series and go 1186 miles to Omaha for the 6th time.
Interesting UVA Baseball Facts:
- Virginia is making its eighth super regional appearance. All eight have come in the last 14 years (2009-23). Only Florida (9), Florida State (9) and LSU (9) have more super regional appearances in that span.
- The Cavaliers have reached the College World Series five times since 2009, the most of any ACC school. Only Florida (7), Arkansas (6) and Texas (6) have been to Omaha more times in the last 14 years.
- Since 2020, Virginia has accumulated 137 overall wins, the most of any ACC school.
Financial Markets
1. S&P 500 Finishes Higher After Entering Bull Market
U.S. stocks rose Friday, with all three major indexes posting gains for the week.
Trading was relatively quiet the past several days, with investors largely in wait-and-see mode ahead of next week’s inflation data and the Federal Reserve interest-rate decision.
Underneath the surface, though, a number of stocks staged big rallies—helping lift the S&P 500 out of a bear market on Thursday and powering the Nasdaq Composite to its longest streak of weekly gains since 2019.
Tesla stock, which surged all week long, extended its rally after General Motors said it would produce electric vehicles with Tesla charge ports starting from 2025. Chipmakers added to their substantial gains for the year, as shares of Nvidia and Advanced Micro Devices soared thanks to rising interest in companies at the forefront of artificial intelligence and computing.
In Friday trading:
Stocks rose. The S&P 500 notched its fourth straight week of gains, while the Nasdaq Composite logged its seventh straight weekly gain.
Tesla shares had their 11th straight session of gains. That ties its longest winning streak ever: the 11 straight sessions through January 2021.
Treasury yields edged higher. The yield on the 10-year note crept up to 3.735%, from 3.714% a day earlier. Yields rise as bond prices fall.
Overseas stocks were mixed. Asian stocks gained, with Japan’s Nikkei 2% higher and Hong Kong’s Hang Seng up 0.5%. The Stoxx Europe 600 fell 0.1%.
2. Oceans Are Under Threat and What That Means for ESG Investors
The world’s oceans are under threat, risking trillions of dollars in revenue, a new report warns. But the dire situation is also an opportunity to invest in ocean-based climate solutions, such as offshore wind power.
The study, from Citi Global Perspectives and Solutions (GPS), found that $4.3 trillion of revenue could be at risk today because of direct damage to the marine environment from things like fishing and habitat loss. In addition, $27 trillion of revenue could be indirectly at risk from other ocean stressors, such as pollution and greenhouse gas (GHG) emissions. Pollution, particularly plastics, is widely considered to be harmful to ocean biodiversity and ecosystems.
“Ocean health is intrinsically connected to climate change,” Ying Qin, global thematic analyst at Citi Global Insights and lead author of the report, said in an interview. “It’s not a niche theme or topic—it is very connected to a lot of the emerging sustainability themes and trends and there are a lot of opportunities that perhaps mainstream investors are not aware of with regards to the ocean.”
The analysis was based on 2021 revenue figures from 48,000 public companies across all sectors, not just marine-based industries.
While there is plenty of risks—from the threat of sea level rise and the destruction of coastal habitats to supply chain disruptions and pollution—there are also plenty of opportunities in the ocean economy, the report said, including in the emerging industries of offshore renewables and carbon capture and storage, or CCS for short. Offshore wind capacity has grown steadily over the past decade, from 3 Gigawatts (GW) in 2010 to 34 GW in 2020. It is expected to reach 380 GW by 2030 and more than 2,000 GW by 2050.
3. Apple Unveils ‘Vision Pro’ AR Goggles
Apple’s augmented-reality headset announcement hasn’t exactly met ‘new iPhone’ levels of excitement among Wall Street analysts or investors.
Apple shares were down 0.5% in premarket trading Tuesday at $178.75. The stock closed down 0.8% on Monday as the headset announcement led to questions over its $3,499 price tag and how customers are likely to use it.
The iPhone maker’s $3,499 Vision Pro headset, set to go on sale next year, joins a crowded field from rivals such as Meta Platforms, TikTok owner Byte Dance, Samsung Electronics and Sony. They are predicting that entertainment, work, and leisure will take place in virtual reality or with digital content interspersed with the real world.
Most of the companies that have launched products so far have done so with the goal of keeping prices low enough to entice millions of new users. Apple opted for a different approach: showing off everything such a device is capable of at a price point that far fewer people will find accessible, experts and developers say. Meta and Byte Dance offer headsets for less than $500. Instead of instantly trying to compete with them, Apple seems to play a longer-term game of slowly developing a high-quality device and bringing the cost down over time.
4. Toyota to Build New Automotive Battery Lab at Michigan R&D Headquarters
Toyota Motor North America said Thursday that it will invest nearly $50 million to construct a new laboratory facility at its North American R&D headquarters in York Township, Mich.
The company said the new lab will evaluate batteries for electric and electrified vehicles in North America.
The new facility will be included in Toyota’s enrollment in DTE Energy’s MI Greenpower program. This voluntary renewable energy program enables all of Toyota’s Research and Development operations in Michigan to attribute 100% of its electricity use to renewable energy projects starting in 2026.
By 2025, the company plans to have an electrified option available for every Toyota and Lexus model globally. Toyota plans to invest more than $70 billion globally in vehicle electrification by 2030.
5. Banks are cutting off Binance’s access to the U.S. banking system
Binance Holdings Ltd., branded Binance, is a global company that operates the largest cryptocurrency exchange in terms of the daily trading volume of cryptocurrencies.
Its US customers will no longer be able to use U.S. dollars to buy crypto on the platform as early as June 13, hobbling the exchange’s ability to do business in the U.S., after both payment and banking partners “signaled their intent to pause USD fiat channels,” the exchange said.
Binance announced the change late Thursday night on Twitter and blamed the U.S. Securities and Exchange Commission’s “unjustified civil claims against our business.” The exchange said it had preemptively disabled customers’ ability to buy and deposit U.S. dollars.
Binance’s banking transactions are the center of immense scrutiny by the SEC, which filed a civil complaint against the exchange and its founder, Changpeng Zhao, alleging both violated U.S. securities laws.
Customers won’t lose their money. Those who haven’t withdrawn their money by the shutdown date could still theoretically convert it to a stablecoin such as a tether, then withdraw that and convert it back to dollars elsewhere. But it suggests Binance’s banking partners have decided the exchange is too risky a client to keep on, and that the revelations from the SEC case have grown too significant to ignore.
The exchange’s disclosed U.S. banking partners, which have included Axos Bank, Cross Riverbank, and the failed Silvergate, Signature, and Silicon Valley Banks, processed billions of dollars in transactions for the U.S. exchange, according to documents Binance provided to the SEC. Multiple banking partners had already stopped serving Binance and it wasn’t immediately clear which banking partners Binance retained.
6. Shares of Tesla jumped on Friday, rising about 5.8%
The stock’s gain came after General Motors (GM 2.02%) said Thursday afternoon that it is partnering with Tesla to start enabling its electric vehicles (EVs) to charge at Tesla’s fast-charging stations, called Superchargers.
Starting in 2024, GM EVs will get access to Tesla’s network of about 12,000 Superchargers (and growing). Existing GM EVs will require an adapter. Beginning in 2025, however, GM EVs will be built with the North American Charging Standard (NACS) inlet, enabling them to connect without an adapter.
This adds to the news several weeks ago that Ford Motor Company is also partnering with Tesla to access its charging network. The positive for Tesla, in this case, is quite clear. First of all, the fees collected from GM vehicles will help fund further growth of Tesla’s Supercharger network. Second, this move will likely help accelerate mass-market adoption of electric vehicles. While this will make Tesla’s competition more formidable, it may also lead to a scenario in which, as the saying goes, “a rising tide lifts all boats.” In other words, a move like this could create more awareness and demand for EVs overall, leading to accelerated growth for Tesla.
7. Shares of Salesforce climbed 12.6% last month
According to S&P Global Market Intelligence, shares of Salesforce (CRM) steadily gained throughout the weeks leading up to its quarterly earnings report amid broader momentum for growth stocks. The leader in enterprise cloud software closed out the month by exceeding Wall Street’s forecasts for first-quarter sales and earnings.
Salesforce’s forward price-to-earnings ratio is nearly 28, even after its post-earnings slide. That’s a substantial valuation increase after it was around 22 earlier this year.
It’s fairly high for a company that is growing roughly 10% this year. However, there is hope that Salesforce can deliver top-line acceleration when macroeconomic conditions improve. It’s also delivering expanding profit margins, so the company is primed to become a cash-flow monster over the next few years.
There’s still a compelling long-term investment narrative here, but investors should be prepared for volatility thanks to that valuation.
Sources:
(1) www.bloomberg.com
(2) www.spglobal.com
(3) www.wsj.com
(5) www.worldbank.org
(6) www.barrons.com
(7) www.wric.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.
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.
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