Dear Friends,
Consumers plan to spend a total of $35.7 billion on Mother’s Day this year, nearly $4 billion more than last year’s record high of $31.7 billion, according to the annual survey released today by the National Retail Federation and Prosper Insights & Analytics.
Mother’s Day is celebrated around the world as a way to honor the women who gave us life and the universal traditions and ancestry of motherhood. While we think flowers, gifts and dinner reservations are excellent ways to honor mothers, we think creating the conditions to empower all mothers might make a stronger statement. Wherever you’re celebrating this year, take a moment to consider what life is like for the mothers in your country and make a commitment to make every mother count.
Economy, Geopolitics, and Commodities
1. Biden, Republicans Dig In on Debt Ceiling
President Biden and Republicans continued to stare each other down over the debt ceiling with just weeks to go until the U.S. potentially defaults on paying its bills, while some Democratic lawmakers floated ways to make progress toward raising the borrowing limit. House Republicans have demanded spending cuts in exchange for raising the debt ceiling. Mr. Biden and Democrats in Congress maintain that the federal borrowing limit should be raised without preconditions and have called the GOP stance irresponsible. Meetings between top congressional staff and White House aides were under way Wednesday, a day after Mr. Biden met with leaders in a tense meeting that yielded no significant progress. Mr. Biden and his senior advisers insist that the staff-level conversations should be focused solely on spending and must not veer into negotiations over raising the debt limit. Some Democrats privately acknowledge that the spending discussions offered a potential off-ramp for the debt-ceiling drama. If negotiators can reach an agreement on spending that paves the way for raising the debt ceiling, both sides could declare victory. Mr. Biden could argue he successfully kept the two issues separate, and Republicans will make the case that they extracted concessions from the White House. But such a deal remains far off.
2. Inflation Eased in April but Remains Stubbornly High
Inflation edged slightly lower in April, likely keeping the Federal Reserve on course to pause interest-rate increases at its next meeting. The consumer-price index rose 4.9% in April from a year earlier, the Labor Department said Wednesday, down from March’s 5% increase. The inflation reading has declined from a recent peak of 9.1% in June 2022 but remains historically high. Wednesday’s report showed that so-called core prices, which exclude volatile food and energy items, rose 5.5% from a year earlier, a slightly slower increase than in March. Economists see core prices as a better predictor of future inflation. Core prices remain elevated due to persistently strong shelter costs. Housing price changes can take time to show up in inflation data due to the lag in mortgage and rental contracts. Excluding shelter along with food and energy, prices rose 3.7% in April from a year earlier. In April, used vehicle prices surged by 4.4% over the month due to a lack of inventory, while new car prices declined modestly. Gasoline prices rose in April but have more recently moderated. On a monthly basis, consumer prices rose a seasonally adjusted 0.4% in April, versus a 0.1% gain in March. April’s increase was driven by housing costs, which economists expect to cool in the coming months. Gasoline and used-car prices also rose last month. Wednesday’s report makes it easier for the Fed to pause rate increases because it showed price pressures aren’t worsening and might soon be slowing. The Fed has aggressively raised rates for more than a year to try to tame inflation by slowing economic activity. The central bank is looking to see signs of inflation declining toward its 2% target. Until now, officials have been looking for clear signs of a slowdown to justify ending rate increases. But Mr. Powell indicated that calculation could shift now, and officials would need to see signs of stronger-than-expected growth, hiring, and inflation to continue raising rates. The Fed slows the economy by lifting rates, which causes tighter financial conditions such as higher borrowing costs, lower stock prices, and a stronger dollar.
3. Asia Poised to Drive Global Economic Growth, Boosted by China’s Reopening
Asia and the Pacific area is a relatively bright spots amid the more somber context of the global economy’s rocky recovery. Growth in Asia and the Pacific is forecast to accelerate to 4.6 percent this year from 3.8 percent last year. China and India together are forecast to generate about half of global growth this year. According to the IMF (International Monetary Fund), the region will contribute about 70 percent of global growth this year—a much greater share than in recent years. The main development has been the reopening of China, where surging consumption is boosting growth across the region despite weaker demand from the rest of the world. Risks to the outlook include spillovers from greater-than-expected US monetary policy tightening and supply chain disruptions associated with geoeconomic fragmentation. But the region also faces important challenges. In the short term, monetary and fiscal policies will need to remain tight to bring inflation durably back to central bank targets and stabilize the public debt. An integrated policy response using all available tools will be needed to manage global shocks. While Asia’s financial systems haven’t seen major impacts following recent banking turmoil in the United States and Europe, they need to be carefully monitored given the high leverage among households and corporates.
4. Data Shows Global Growth Continues to be Buoyed by Service Sector Expansion
The global economic expansion accelerated at the start of the second quarter, with the services industry leading the pack, while manufacturing performance lagged. Consequently, developments on the inflation front likewise diverged, though a key question for the inflation outlook is how durable the ongoing service sector resurgence will be.
The JPMorgan Global Composite Output Index, which measures global manufacturing output and global services business activity, posted 54.2 in April, up from 53.4 in March. This marked the third consecutive monthly expansion of the global economy, at the fastest pace since December 2021. The latest reading is indicative of global GDP rising at a quarterly annualized rate of approximately 4.0%. Although both manufacturing and service activity grew at faster rates, the gap between the rates of expansion widened for a second straight month to signal an increasing sectoral divergence. This was mainly accounted for by faster service sector growth amid increased demand, especially within the consumer services sector, where tourism activity further surged at the start of the second quarter. This consumer services surge was especially prominent in Asia, following the removal of COVID-19 containment measures in mainland China, but also reflects the global economy’s first year of unrestricted global travel since the pandemic.
Meanwhile, manufacturing sector output rose for a third straight month, albeit only mildly. While new orders for goods remained in contraction territory, the healing of global supply chains enabled the improvement in output performance. That said, the lack of demand growth remains worrying, especially if the surge in demand for services wanes in the months ahead.
5. Good News for Your Utility Bills: Gas Producers Keep Drilling
When natural-gas prices plummeted this winter, the conventional wisdom held that producers would dial back on drilling to help tighten supplies. But they kept right on drilling. That trend is a potential boon for consumers, who could benefit from lower electricity bills heading into the hot summer months, but a risky gambit factor for gas companies. Previous price crashes saw operators swiftly shut-in wells, shelve rigs, and lay off workers. This time, companies are betting that the lull is only short term and that resilient demand for gas, combined with new liquefied-natural-gas export terminals coming online, will boost prices starting next year, according to executives and analysts. As of the week that ended May 5, the number of rigs drilling for gas was 157, according to Baker Hughes—11 more compared with the same time last year, when U.S. gas prices were nearly four times higher. The EIA (Energy Information Administration) said it expected U.S. natural-gas production to average 100.9 billion cubic feet a day this year, 3% higher than in 2022. An abundance of gas was likely to mean lower electricity prices for consumers as they head into the summer months when they turn on the air conditioning. Residential gas users last year bore the brunt of price volatility in the form of onerous electricity and heating bills.
Financial Markets
1. The S&P 500 fell Friday as concerns around the U.S. economy and regional banks dampened investor sentiment
The Dow Jones Industrial Average traded 54 points lower, or 0.2%. The Nasdaq Composite fell 0.5% while the S&P 500 slipped about 0.3%. A preliminary reading on the University of Michigan’s consumer sentiment index fell to a six-month low of 57.7. Economists polled by the Dow Jones expected a May reading of 63.0. The survey also showed the outlook for inflation over the next 5 years climbed to 3.2%, tying the highest clip since June 2008. Investors are also keeping an eye on Washington as concerns around debt ceiling negotiations persisted. CNBC reported that a debt ceiling meeting between President Joe Biden and congressional leaders that was set for Friday was postponed to next week. Import prices were 0.4% month-over-month in April, the Bureau of Labor Statistics said Friday, marking the first rise so far in 2023. Economists polled by Dow Jones were expecting a 0.3% rise last month, compared to the decline of 0.6% the prior month.
2. S&P 500 Earnings Summary of Q1 2023
At this late stage of the Q1 2023 earnings season, S&P 500 companies are recording their best performance relative to analyst expectations since Q4 2021. Both the number of companies reporting positive EPS surprises and the magnitude of these earnings surprises are above their 10-year averages. The index is reporting higher earnings for the first quarter today relative to the end of last week and relative to the end of the quarter. However, the index is still reporting a year-over-year decline in earnings for the second straight quarter. Overall, 85% of the companies in the S&P 500 have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 73%. In aggregate, companies are reporting earnings that are 7.0% above estimates, which is below the 5-year average of 8.4% but above the 10-year average of 6.4%. As a result, the index is reporting higher earnings for the first quarter today relative to the end of last week and relative to the end of the quarter. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the first quarter is -2.2% today, compared to an earnings decline of -3.7% last week and earnings decline of -6.7% at the end of the first quarter. Five of the eleven sectors are reporting year-over-year earnings growth, led by the Consumer Discretionary and Industrials sectors. On the other hand, six sectors are reporting a year-over-year decline in earnings, led by the Materials and Utilities sectors.
3. The Regional Bank Selloff Visualized
Some investors are still worried about the health of regional banks as another week of turbulence sent shares of many of the companies tumbling before a rally on May 5th. In a week that included another interest-rate hike by the Federal Reserve and a rescue of First Republic by JPMorgan Chase, the KBW Regional Banking Index, which tracks regional banks in the U.S., was down 28% this year, through Friday. This comes after two months of turbulence in the banking industry that was triggered by the collapse of regional lenders Silicon Valley Bank and Signature Bank. Some banks have suffered more than others. PacWest Bancorp has seen its market capitalization decline by 75% this year. Metropolitan Bank Holding’s market cap shrank by 60% since the beginning of the year, while Western Alliance Bancorp and First Horizon’s value waned by 53% and 55%, respectively. Each bank experienced a reduction in deposits during the first quarter. As the Fed continued raising interest rates this year, many customers moved their money out of checking accounts and into products such as money-market funds and Treasurys, which are paying greater yields.
4. Coca-Cola Trials Turning Hard-to-Recycle Plastic Into Bottles
Coca-Cola is trialing technology in Europe that turns hard-to-recycle plastic into new bottles, as part of its effort to meet its sustainability goals. The company’s biggest European bottler, Coca-Cola Euro pacific Partners, is funding a startup in the Netherlands that will produce food-grade recycled plastic from plastics that usually get sent to landfill or are incinerated—such as films, trays, clothing, and colored packaging. It will create an additional source of recycled material. Current supplies of recycled plastic are costly and limited, which is keeping companies hooked on abundant and cheaper oil as a key ingredient in the production of packaging. Coca-Cola is aiming to boost the proportion of recycled materials that make up its packaging to 50% by 2030. The soft drinks group has achieved around 25% so far. The company needs its bottlers to use more recycled materials to meet its own sustainability goals. The new process from startup CuRe Technology cleanses and partially breaks down plastics for reassembly into recycled material. Its so-called partial depolymerization method removes color from polyester, turning it into clear polyethylene terephthalate—or PET—pellets. A study commissioned by CuRe said its process results in roughly 65% lower greenhouse-gas emissions than oil-based new plastic production. Coca-Cola Europacific Partners invested in CuRe in 2020 and again this year.
5. Shares of Duolingo soared as much as 17.4% this week
As the language-learning application posted strong growth across all its key metrics, this company has started to generate healthy cash flow and led investors to bid up its shares. Duolingo released its Q1 earnings earlier this week on May 9, and all its key numbers looked incredibly strong. Monthly active users (MAUs) grew 47% to 72.6 million, and daily active users (DAUs) grew 62% to 20.3 million. This led to a strong 63% bump in paying subscribers to 4.8 million, which drove bookings growth of 37% to $140.1 million in the quarter.
6. Alphabet stock popped more than 10% over the week
The parent company of Google, YouTube, and Google Cloud rose after its annual product event called Google I/O, where executives announced dozens of product updates and new artificial intelligence (AI) features. The growth of Pixel hardware will be exciting to watch, with device sales reportedly up over 200% in North America. However, the company still only holds a 2% share of the smartphone market. If this can bump up to 5% to 10% over the next few years, it will not only boost Alphabet’s overall sales but also reduce the fees it pays to other hardware makers like Apple, Samsung, and LG.
7. Elon Musk names Linda Yaccarino as Twitter’s new CEO
Elon Musk has named Linda Yaccarino as Twitter’s new CEO, ending intense speculation about who the billionaire would appoint as his successor at the social-media platform. Yaccarino resigned from her longtime role as advertising boss at NBCUniversal earlier Friday, but has yet to publicly comment. The announcement appears to end the guessing game of who Musk would name as CEO, following his $44 billion takeover deal last year.
Sources:
(1) www.cnbc.com
(2) www.spglobal.com
(3) www.imf.org
(4) finance.yahoo.com
(5) www.wsj.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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