- JP Morgan Jamie Dimon provides upbeat guidance and outlook at investor day presentation
- Deere & Co. raises dividend 8%
- Raytheon wins $423 million contract with the U.S. Navy
- Microsoft wins Azure cloud contract with Meta and contributes to global carbon dioxide reduction fund
- Dick’s Sporting Goods releases earnings beating profit and revenue estimates; lowers full fiscal year guidance on cautious outlook
- ABB agrees to participates in fundraising round for Norwegian battery production company and signs contract to provide automated paper testing solution for Taiwan based company
Domestic Economic News
Overall the domestic U.S. economic news was mixed this week. Sales of new US homes fell in April by the most in nearly nine years, dented by the combination of high prices and a steep climb in mortgage rates. Purchases of new single-family homes decreased 16.6% to an annualized 591,000 pace, the weakest since April 2020, government data showed Tuesday. The figure fell well short of all estimates in a Bloomberg survey of economists, which called for a 749,000 rate. Home ownership is becoming increasingly out of reach for many Americans, as a rapid run-up in mortgage rates collides with record prices. The average rate on a 30-year mortgage was 5.25% last week, up from around 3% at the end of 2021, Freddie Mac data show. A separate report last week showed a measure of homebuilder sentiment fell in May for a fifth straight month amid concerns over rising construction costs and a slowdown in demand. The new-home sales report, produced by the Census Bureau and the Department of Housing and Urban Development, showed the median sales price of a new home rose 19.6% from a year earlier, to a record $450,600. There were 444,000 new homes for sale as of the end of the month, the most since 2008. However, nearly all had yet to be completed. At the current sales pace, it would take 9 months to exhaust the supply of new homes. That compares with 6.9 months in the prior month and 4.7 months one year ago.
On a more positive note, orders placed with US factories for durable goods rose in April, highlighting firm and sustained demand for equipment and merchandise. Bookings for durable goods -- items meant to last at least three years -- increased 0.4% in April after a downwardly revised 0.6% advance a month earlier, Commerce Department figures showed Wednesday. The figures aren’t adjusted for inflation. The value of core capital goods orders, a proxy for investment in equipment that excludes aircraft and military hardware, climbed 0.3% after a 1.1% gain a month earlier. The median estimates in a Bloomberg survey of economists called for a 0.6% increase in orders for all durable goods and a 0.5% gain in the core figure. The figures suggest companies are adhering to capital expenditures plans as they seek to enhance productivity to ease the burden of high inflation and a tight labor market. It’s less clear, however, whether businesses later this year will reconsider the current pace of investment in the face of higher interest rates and an anticipated cooling of economic activity. Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s gross domestic product report, increased 0.8%, pointing to a solid start to second-quarter growth. The advance report showed a surge in equipment investment.
Recent regional manufacturing surveys, however, suggest a slowdown on the horizon. The Federal Reserve Bank of Philadelphia’s index of capital expenditures six months from now dropped in May to a six-year low, while a similar gauge from the New York Fed was the weakest since August. The advance in durable goods reflected stronger bookings for commercial aircraft, primary metals and machinery. Bookings for commercial aircraft rose 4.3% after falling the prior month, the government data showed. Boeing Co. reported 46 orders in April, down from 53 a month earlier. While often helpful to compare the two, aircraft orders are volatile and the government data don’t always correlate with the company’s figures. Bookings for motor vehicles eased after a surge in March. Durable goods orders excluding transportation equipment climbed 0.3% last month. Even if demand for equipment slows, factory backlogs will lend support to the pace of production. The report also showed unfilled orders for all durable goods rose 0.5% for a second month, while inventories increased 0.8%.
US mortgage rates posted the biggest drop in more than two years, offering homebuyers a slight reprieve from this year’s massive surge in borrowing costs. The average for a 30-year loan declined to 5.10% from 5.25% last week, Freddie Mac said in a statement Thursday. That was the biggest decline since April 2020, but rates are still well above the 3.11% level at the end of last year. While rates fell this week, their rapid rise over the past four months has started to take a toll on demand. The Federal Reserve is raising interest rates to combat inflation, raising affordability concerns for buyers who are struggling to find properties. The median mortgage payment for new purchase applications in April was up 8.8% from a month earlier due to higher rates and rising home prices, according to Mortgage Bankers Association data released Thursday. “Mortgage rates decreased for the second week in a row due to multiple headwinds that the economy is facing,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Despite the recent moderation in rates, the housing market has clearly slowed, and the deceleration is spreading to other segments of the economy, such as consumer spending on durable goods.” At the current 30-year average, a borrower with a $300,000 mortgage would pay $1,628 a month, roughly $346 more than at the end of last year.
Applications for US unemployment insurance declined last week by more than forecast, underscoring a persistently tight labor market. Initial unemployment claims decreased by 8,000 to 210,000 in the week ended May 21, Labor Department data showed Thursday. The median estimate in a Bloomberg survey of economists called for a drop to 215,000. Continuing claims for state benefits rose to 1.35 million in the week ended May 14. Initial claims remain at a historically low level, pointing to a strong labor market with few dismissals. That said, the Federal Reserve has started to raise interest rates to rein in exceptionally high demand in the economy, which could slow hiring or lead to layoffs later this year. After a big increase in claims in the prior period, the drop in applications may assuage concerns that a cooling in labor demand has already set in. The data comes ahead of the government’s May jobs report, which is forecast to show a drop in the unemployment rate when released next week. On an unadjusted basis, initial claims decreased to 183,927 last week. California and Kentucky, which posted some of the largest increases in the prior period, reversed to show a drop in claims last week. Illinois also registered a sizable decline.
The Federal Reserve’s preferred inflation gauge rose 4.9% in April from a year ago, a still-elevated level that nonetheless indicated that price pressures could be easing a bit, the Commerce Department reported Friday. That helped market sentiment in early trading Friday. That increase in the core personal consumption expenditures price index was in line with expectations and reflected a slowing pace from the 5.2% reported in March. The number excludes volatile food and energy prices that have been a major contributor to inflation running around a 40-year peak. The 0.3% increase on a monthly basis was the same as March and in line with Dow Jones estimates. Including food and energy, headline PCE increased 6.3% in April from a year ago. That also was a deceleration from the 6.6% pace in the previous month. However, the monthly change showed a more marked pullback, with an increase of just 0.2% compared with the 0.9% surge in March. The data showed that consumers continued to spend but were tapping into their savings to do so. “Consumers remained undaunted by inflation last month, strongly increasing spending and changing their mix to more services such as at bars and restaurants, and travel and recreation as the weather warms,” said Robert Frick, corporate economist at Navy Federal Credit Union. “The spending was fueled in part by higher wages, and also by Americans drawing more money out of savings, which is a giant stockpile of at least $2 trillion.”
Inflation for the past several months has been moving at a pace not seen since the early 1980s. The inability of supply to keep up with demand has pushed prices higher, fed by unprecedented fiscal stimulus during the Covid pandemic, clogged global supply chains and the war in Ukraine that has sent energy prices soaring and led to fears of food shortages. Responding to the price pressures, the Fed has implemented two interest rate increases totaling 75 basis points and has indicated that a series of hikes are likely ahead until inflation comes closer to the central bank’s 2% goal. The PCE numbers reported Friday are lower than the consumer price index used by the Bureau of Labor Statistics. Headline CPI for April rose 8.3% from last year. The two numbers differ in that the CPI tracks data from consumers while PCE is extracted from businesses. The Fed considers PCE a broader-based measure of what is happening with prices on a variety of levels. Along with the inflation data, the BEA reported that personal income rose 0.4% during the month, a 0.1 percentage point decline from March and a slight miss on the 0.5% estimate. Consumer spending, however, held up, rising a better-than-expected 0.9%, though that was below March’s upwardly revised 1.4%. Income after taxes and other charges was flat for the month after falling 0.5% in March. US wage growth looks to be peaking, a heartening development for the Federal Reserve if not for American workers. After handing out hefty salary increases over the past year, companies are now becoming more cautious with their cash over concern further big payouts will eat into profits, according to staffing companies, business owners and recent surveys. Economists are penciling in a moderation in annual earnings growth to 5.2% in May from April’s 5.5% in data out next week.
The US merchandise-trade deficit shrank in April by the most since 2009 as imports fell amid lockdowns in China while exports increased to a record. The shortfall narrowed by 15.9% to $105.9 billion last month, following a record level in March, Commerce Department data showed Friday. The figures, which aren’t adjusted for inflation, compared with a median estimate for a gap of $114.9 billion in a Bloomberg survey of economists. Aggressive lockdowns by the Chinese government to curb the spread of Covid-19 have complicated the near-term trade picture, with the measures -- coupled with Russia’s war in Ukraine -- straining already-tenuous global supply chains. While the volume of products arriving at the biggest US ports in April was near records, a worldwide acceleration in inflation is testing goods trade, with the World Trade Organization cutting its forecast for growth in global merchandise volumes this year. In the first quarter, the widening of the trade deficit largely explains the economy’s worst performance since the pandemic recovery began, with gross domestic product shrinking at a 1.5% annual pace. That’s because the value of products American businesses and consumers bought from overseas outpaced purchases of U.S. goods and services by other economies.
Overall the reports on Friday were well received.
Interest Rate Insight and the Fed
Most Federal Reserve officials agreed at their gathering this month that the central bank needed to tighten in half-point steps over the next couple of meetings, continuing an aggressive set of moves that would leave policy makers with flexibility to shift gears later if needed. “Most participants judged that 50 basis-point increases in the target range would likely be appropriate at the next couple of meetings,” minutes of the Fed’s May 3-4 meeting released Wednesday in Washington showed. “Many participants judged that expediting the removal of policy accommodation would leave the committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.” US central bankers are trying to cool the hottest inflation in 40 years without tilting the economy into a recession. After raising interest rates by a half-percentage point at the May meeting, the minutes confirmed support by most officials to continue such increases over at least their next two gatherings with their inflation battle far from won. Fed officials “noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook,” the minutes said. They said that labor demand continued to outstrip available supply. In the weeks since the meeting, financial-market volatility has spiked as investors fret over the risk of a downturn. Stocks have fallen, Treasuries and high quality bonds have rallied and investors have pared back bets on how quickly policy rates will rise.
Atlanta Fed President Raphael Bostic suggested on Monday that a September pause “might make sense” if price pressures cooled. The minutes showed officials attentive to financial conditions as they prepare to raise rates further. “Several participants who commented on issues related to financial stability noted that the tightening of monetary policy could interact with vulnerabilities related to the liquidity of markets for Treasury securities and to the private sector’s intermediation capacity,” the minutes said. Worry about the outlook for corporate profits and rising interest rates has also roiled financial markets. The Standard and Poor’s 500 stock index was down over 17% year-to-date through Tuesday, while U.S. Treasury two-year notes yielded 2.48% versus about 0.8% in early January. At the meeting, officials also finalized plans to allow their $8.9 trillion balance sheet to begin shrinking, putting additional upward pressure on borrowing costs. Starting June 1, holdings of Treasuries will be allowed to decline by $30 billion a month, rising in increments to $60 billion a month in September, while mortgage-backed securities holdings will shrink by $17.5 billion a month, increasing to $35 billion. The minutes showed that the Fed staff revised up their inflation forecast. They estimated that the personal consumption expenditures price index would rise 4.3% in 2022 before decelerating to a 2.5% increase next year. U.S. central bankers are quickly pulling back monetary stimulus as they attempt to curb the highest inflation rates in decades. Price gains have been fueled by low interest rates, knotted supply chains and higher food and energy costs in the wake of Russia’s invasion of Ukraine.
Markets gyrated after the minutes were released but at this point we are more focused on policy action and comments coming up at their June meeting as the minutes are a look into the rear view mirror. It makes sense to us the Fed talks tough, raises rates early on the cycle and then once the effects are felt in the economy then take note of the date as it comes in. They want to bring inflation down but they do not want to tilt the economy into recession. Raises rates 50 basis points at the next two meetings will provide the committee with more decision making flexibility in the second half of the year.
Impactful International NewsStocks futures and the yuan advanced after pre-market Monday morning after seven weeks of straight declines for the broader U.S. equity averages after President Joe Biden signaled he’d reconsider China tariffs imposed by the Trump administration. The dollar and Treasuries retreated. S&P 500 futures rose, signaling more gains after a late Friday rally saved the index from a bear market. VMware Inc. was also the focus of attention as it rose in pre-market trading after Bloomberg News reported that Broadcom Inc. was in talks to acquire the cloud-computing company backed by billionaire Michael Dell. Energy and basic resources led gains in Europe’s Stoxx 600 Index as oil and base metals rose. The euro jumped after European Central Bank Chief Christine Lagarde said higher interest rates are coming in July. Traders interpreted Biden’s comments that he’ll discuss the US tariffs on Chinese imports with Treasury Secretary Janet Yellen when he returns from his Asia trip as a signal there could be a reversal of some Trump-imposed measures. Regardless of the view on whether the tariffs were an effective negotiating tool to win concessions from China on trade, it would be timely to reduce them given the current supply chain issues and inflation we are experiencing today in the supply chain. Any relief on this front would be welcome indeed! Traders see this as a possible de-escalation of the trade war between the two economic superpowers, and this pre-market Monday revived trading optimism towards riskier assets. European Central Bank President Christine Lagarde’s prospective timetable for two quarter-point interest-rate hikes has irked colleagues who want to keep open the option of moving faster, according to people familiar with the matter. The plan to exit subzero monetary policy by the end of the third quarter that was revealed in a blog post on Monday would effectively exclude a half-point move, a position that leaves some more hawkish officials uncomfortable, said the people, who declined to be identified because discussions are confidential. Lagarde’s intention to conclude almost a decade of subzero interest rates was spelled out in a blog post on the ECB’s website. Her comments imply a 25 basis-point hike at both the July and September meetings. An ECB spokesperson declined to comment. The euro traded at around $1.0668 after the announcement, holding onto earlier gains. While ECB policy makers have increasingly coalesced around the prospect of a first hike at their July 21 meeting in recent weeks, they have barely mentioned the possibility of a more aggressive half-point move such as the US Federal Reserve delivered this month. The only official to publicly allude to that option until now has been Dutch central bank Governor Klaas Knot, who said on May 17 that his preference would be for a quarter-point increase, “unless new incoming data in the next few months suggests that inflation is broadening further or accumulating.” Officials have also displayed unity about waiting until July, rather than acting faster with a move in June that would jar with their guidance saying that bond purchases should end before a rate hike. Possible tensions behind the scenes on the path of monetary policy would be taking place against a backdrop of a rapidly shifting global economic environment. Inflation now reached 7.4% in the euro zone and most of the ECB’s peers are already now in a tightening mode. Any discord would evoke memories of the tenure of Lagarde’s predecessor, Mario Draghi, whose leadership style riled some colleagues who made their views increasingly known toward the end of his tenure. In contrast with many outspoken colleagues in recent weeks, the president has been relatively reticent in specifying her view on rate hikes, making her Monday remarks all the more significant. The view she shared is still more aggressive than some dovish members of the Governing Council, for example Bank of Italy Governor Ignazio Visco. “We can move gradually, raising interest rates in the coming months,” Visco said in an interview with Bloomberg Television on Friday. While June is too early as that is when the ECB will end net bond purchases, “we will move after that,” he indicated. Europe is facing a balancing act between inflation and raising rates too quickly which could tilt the region into recession. We had good news coming out of China on Friday which was a nice change. They made a couple of key announcements about opening up their capital markets to outside investors. China will allow foreign institutional investors to buy bonds traded on its smaller exchange market in the latest step to widen global access to its financial markets, as calls grow for the government to sell more debt to pay for extra stimulus to boost a flagging economy. Qualified foreign institutional investors ranging from central banks and sovereign funds to commercial banks and pension funds will be allowed to invest in bonds on the exchange market, the People’s Bank of China said in a statement published on its website on Friday. These financial institutions can trade bond and invest in derivatives, among other bond-based instruments permitted by China’s central bank and its securities regulator, starting June 30, as China seeks to widen international participation in its 138.2 trillion yuan ($20.6 trillion) bond market, according to the statement. Although the economy was already turning down in March, economic indicators for April have started to show the full impact of the lockdown of Shanghai, which affected the world’s largest port, and also the shutdown of industrial hubs such as Changchun. Manufacturing and services activity plunged to their worst levels since February 2020, and export growth, a key driver of the economy’s rebound in the past two years, slowed to its weakest pace since June 2020. Bonds are traded in two markets in China. Foreign investors have been allowed since 2016 to invest in the country interbank bond market, which account for 86% of the China’s total domestic bond market, while the remainder are traded in the exchange market, according to a report last year by the International Capital Market Association and China’s Association of Financial Market Institutional Investors. In a separate report, China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission have agreed in principal to include exchange-traded funds in the stock connect program, the regulators announced in a joint statement issued on Friday. Preparation work was expected to take two months and the regulators are going to announce the effective date in separate announcement. Any opening up of the Chinese economy and capital markets is welcome news for traders and investors.
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