I include below the intraday charts in the 2 yr and 10 yr yields reflecting the wild moves after CPI and Powell.
Jay was purposely noncommittal on giving any opinion on the timing of a possible cut and I see no chance that he was one of the dots expecting two. That said, he did highlight that a trigger for a sooner rather than latter cut could take place because of a continued rise in the unemployment rate, among other possible factors more than just a further moderation in inflation.
He said that current policy is ‘well placed’ and they are getting what they want in terms of the direction in inflation. But, because he reiterated his belief that policy is currently ‘restrictive,’ however difficult that is to define, he said that ‘restrictive’ for too long can lead to accidents in the economy which he obviously wants to avoid.
Bottom line, understand what we’re debating here. Whether they cut once or twice after 525 bps of rate increases since March 2022? Who cares. It’s what happens next year and if the cuts are aggressive, it will be because the economy deteriorates notably, more so than if inflation further slows.
Rate cut odds for a 2nd cut have been all over the place today. We started the day pricing in a 38% chance, then went quickly to 72% right after CPI, traded to 88% midday and now are settling out at 56%.
USA: FOMC Median Projects One Cut in 2024, Revises Long-Run Dot Higher
12 June 2024 | 2:39PM EDT
BOTTOM LINE: The FOMC left the target range for the federal funds rate unchanged at its June meeting. The median dot in the Summary of Economic Projections now shows 25bp of cuts in 2024, down from 75bp in March. The median dot now shows 100bp of cuts in both 2025 and 2026 (vs. 75bp each in the March projections), keeping the cumulative amount of cuts across 2024-2026 unchanged at 225bp. The median dot for 2026 remained modestly above the median longer run dot, which increased to 2.75% from 2.56%. For 2024, the Summary of Economic Projections showed a slightly higher core inflation forecast (+0.2pp to 2.8%) and unchanged unemployment rate and GDP growth forecasts.
MAIN POINTS:
1. The FOMC left the target range for the federal funds rate unchanged at 5.25-5.5% at its June meeting. The Committee again noted that “inflation has eased over the past year” and updated the statement to acknowledge that there has been “modest progress toward the Committee's 2 percent inflation objective” in recent months vs. “a lack of further progress” previously. Minimal changes were made to the rest of the post-meeting statement’s characterization of the economy.
2. The median dot in the Summary of Economic Projections (SEP) for 2024 was revised up from the March projections, showing just 25bp of cuts vs. 75bp previously. The median dot showed 100bp of cuts in both 2025 and 2026 (vs. 75bp each in the March projections), keeping the cumulative amount of cuts across 2024-2026 unchanged at 225bp. At 3.125%, the median dot for 2026 sits modestly above the median longer run dot, which increased to 2.75% from 2.56%.
3. The updated economic projections showed slightly higher core inflation for 2024 and 2025, while adjustments to other projections were more modest. The median core inflation forecast was revised slightly higher for 2024 (+0.2pp to 2.8%) and 2025 (+0.1pp to 2.3%) and unchanged for 2026 (at 2.0%). The median unemployment rate projection was unchanged for 2024 (at 4.0%), and revised modestly higher for 2025 (+0.1pp to 4.2%), 2026 (+0.1pp to 4.1%), and for the longer-run (+0.1pp to 4.2%). The median GDP growth projection was unchanged for 2024-2026.
Fed gives the wording a modest tweak, and any cuts this year will be a tweak as well, whether one or two
As has been the case this year, the FOMC statement was little changed in wording from the prior one which was left mostly unchanged from the one before that.
With its commentary on the economy and inflation, they tweaked the inflation wording. On May 1st they said, “there has been a lack of further progress toward the Committee’s 2% inflation objective.” They took out ‘lack’ and added ‘modest’ to say “there has been modest further progress…”
They left this wording in, “The Committee does not expect it will be appropriate to reduce the target range until is has gained greater confidence that inflation is moving sustainably toward 2%.”
I’m sure Jay will be asked and/or will say what his current status of ‘confidence’ level is.
On to the economic projections vs the March ones given:
They kept their 2024 GDP forecast at 2.1% and their unemployment rate estimate stays at 4%, which we know we’re currently at so magically it will just stay here.
They raised their headline and core PCE inflation forecasts to 2.6% and 2.8% respectively from 2.4% and 2.6% given in March.
As for the median dots, it is at 5.1% from 4.6% given in March and in 2025 they expect a fed funds rate at 4.1%, median measure, from 3.9%. They also raised their ‘longer run’ fed funds rate projection, aka, they raised their R* estimate to .80 from .60% via a 2.8% fed funds rate vs 2.6%, and assuming an eventual long term return to 2% in inflation.
In terms of count, 4 Fed members want no rate cut this year (I’m guessing Bowman, Schmid and maybe Logan are 3 out of the 4 and would be interesting if Powell or Waller was another). Seven expect one cut and 8 forecast two. So, 11 members total don’t expect 2 cuts vs 8 that do.
Bottom line, I do believe the Fed members did incorporate today’s CPI in their discussion and dots and likely not much changed on just a one tenth deviation from estimates. The Fed is certainly leaning with an easing bias but at least for now, we are NOT on the cusp of some easing cycle with a multitude of cuts UNLESS the unemployment rate jumps higher. So, unless we get that, a rate cut or two would be just a tweak that would take some of the edge off current rate levels with inflation slowly slowing. But that’s a far cry from the slash and burn of rates we got used to and its way to zero and reinforces that higher rates (though maybe less high) is still the new reality for a few years to come at least.
The 2 yr yield was at 4.39% right before CPI, was at 4.69% just prior to the statement and now stands at 4.72%. The 10 yr at 4.28% is up 2 bps from 1:59pm est and vs 4.39% at 8:29am est.
Rate cut odds for two this year have been all over the place today. We started the day at 38%, then went to 88% and are now back to 64% post statement and dots.
Not to look at gift horse in the mouth, but the market seems to be pricing in perfection with the S&P 500 getting close to being valued at 22 times forward earnings. The proxy war with nuclear armed Russia in Ukraine seems to be escalating at a quickening pace (and getting little media attention), the government is still running a deficit of 6% to 7% of GDP even as the debt to GDP ratio is the highest in U.S. history, CRE continues to deteriorate, the consumer has spent all the excess savings from all the Covid stimulus and has personal savings rates less than half the pre-pandemic rate, The May BLS jobs number was a joke (full-time positions were whacked), we have a brutal and divisive election on the horizon (and based on results in Europe this weekend, probably a seismic shift in outcome), economic growth has decelerated significantly from the last half of 2023, ratings on regional banks are being cut, there is little notable insider buying in stocks, etc....
I know the market is supposed to climb a 'wall of worry' and that in the near future we will all be skinny thanks to GLP-1 drugs and have AI powered servants, but this future utopia seems fully priced into the market imho. Added some to my short-term treasury holdings. Also did some out of the money, long dated bear put spreads against the S&P 500, just in case Nirvana doesn't materialize in the year ahead.
-RNA +22% (positive initial AOC 1020 data from the Phase 1/2 FORTITUDE trial demonstrating unprecedented and consistent reductions of greater than 50% in DUX4 regulated genes)
-WHLR +18% (momentum)
-AFMD +10% (earnings)
-MREO +8.0% (Ultragenyx and Mereo BioPharma announce new Phase 2 Data from Phase 2/3 Orbit Study demonstrating sustained reductions in fracture rates following treatment with Setrusumab (UX143) in patients with Osteogenesis Imperfecta (OI))
-ORCL +7.5% (earnings, guidance)
-CASY +6.0% (earnings, guidance; raises dividend)
-RARE +4.2% (Ultragenyx and Mereo BioPharma announce new Phase 2 Data from Phase 2/3 Orbit Study demonstrating sustained reductions in fracture rates following treatment with Setrusumab (UX143) in patients with Osteogenesis Imperfecta (OI))
-RBRK +2.1% (earnings, guidance)
Downside:
-TNXP -38% (files to sell public offering of common stock of indeterminate amount)
-STRM -17% (earnings, guidance)
-VRA -16% (earnings, guidance)
-PETS -10% (earnings)
-NVGS -4.0% (prices 7.0M shares at $15.00/shr in upsized secondary offering)
-MAMA -3.1% (earnings)
-TTWO -2.0% (files to sell 2.8M shares from selling shareholder)
Quick Fed preview/Gushing over AI/'consumers shopping episodically'/Other stuff
The FOMC statement has typically been similar to the prior one and today will likely be no different. Powell has tended to sound more dovish at the presser, only for it to be pulled back in the days after by others. He's previously expressed, as we know, the need for more 'confidence' on the further, 'sustainable' deceleration in inflation while keeping a close eye on the slow creep up in the unemployment rate and I don't think he feels he's yet found that confidence and thus won't commit to the timing of an eventual first rate cut, even though he's looking for any reason I believe. I also don't think he's tempted by the tweak lower of interest rates by some of his peers. And as for now, it seems to be more of a tweak rather than the beginning of a string of consistent rate cuts. As for the dots, which we know the market algos will kick in the second they are released, I don't expect them to deviate much from what the market is currently pricing in. And that is, 100% chance of one cut this year and 38% chance of a 2nd. As for what the dots will say about 2025, their crystal ball is no different than yours.
While mortgage rates didn't move much w/o/w, down 5 bps, refi's exploded higher by 28.4% w/o/w which I can't explain. Again, assume most are cash outs. After falling in 10 out of the last 12 weeks, purchase applications rebounded by 8.6% w/o/w.
Average 30 yr mortgage rate according to Bankrate
While Oracle missed both top and bottom line numbers for their Q4, they were just gushing on their conference call on the AI opportunity and gave all the buzz words Wall Street loves right now. "As you know, Oracle's Q4 is known for customers purchasing large software license contracts to power their businesses. But because of the pivot to the cloud, this Q4 was powered by the enormous demand for our cloud services and they showed up in RPO or Remaining Performance Obligations."
"In Q4, Oracle signed the largest sales contract in our history led by huge demand for training large language models."
"Beyond this fiscal year, I remain firmly committed to our fiscal year '26 financial goals for revenue, operating margins, and EPS growth. However, given our strong bookings results, I believe some of these goals might prove to be too conservative given our momentum." And that line is the most likely reason for the big stock pop this morning.
Shifting to retail, from Academy Sports and Outdoors whose comps fell 5.7% in Q1 and another consumer reality check:
"As we expected, our customer remains challenged by the current macroeconomic environment. Inflation is keeping prices at elevated levels, while personal savings have been depleted, causing our customers to be tight with their discretionary spending. The trends we've cited in previous calls in terms of customer shopping patterns held true in the first quarter, with customers shopping episodically while gravitating towards the value offerings in our assortment along with new and innovative items."
Helpful on the economic outlook was what MMM said yesterday at the Wells Fargo Industrials conference as we're just a few weeks from ending Q2:
"When you come to 2Q, what you'll find is the end market trends are pretty consistent to what we told you at 1Q earnings call, which was pretty much saying electronics are stabilizing and continuing to grow and it will continue to grow in the 2nd half. Of course, we'll have to watch the trends as we go there. Industrial markets have been weak, as in some cases you've still got customers that are a little cautious, but again, nothing major to talk about, different from what we told you in April. And then the consumer market continues to remain muted, especially in hardline categories that we play in."
GM spoke at the Deutsche Bank auto conference:
"I'm pleased to say that May was a really, really strong month for us. So when you look at, whether you're talking about just vehicle volumes which I think it was our best month since December of 2020. EV penetration, really strong gains there. But overall, the business is continuing to show that resiliency."
As for EVs, "despite the fact that we're seeing a little bit of slowing in that growth for our portfolio, it's still pretty strong."
As for inventories, "We've talked about 50 to 60 days of inventory. We ended Q1 with 63 days, which didn't give me a lot of concern. And the reason is because we're working through it, getting into a little bit of a seasonally strong period. So at the end of May, we ended with 59 days of inventory. So back into that range."
From Ford at the same conference:
On inventories, "I think we're back at equilibrium and we're getting to the point right now where supply is not constrained any longer."
On the consumer, "I think when you step back and look at it, the market in Europe I think there's a little bit more pressure in Europe than there is here in the US. So far the consumer has held up pretty well. Pricing has held up but inventories I think are back to the point where we need to be very thoughtful as an industry about the production versus demand and then the supply that's in the marketplace. So, we're watching that very closely. We're still targeting to be somewhere between 50 and 60 dealer days' supply."
I'll add, auto sales have yet to exceed the 2019 pace. For the first 5 months of 2019, they averaged 16.9mm SAAR. In the first 5 months of 2024, they are averaging 15.6mm. The cost of money is definitely a factor as the average 60 month auto loan rate for a new car is at 8% vs about 5% then.
Bankrate 60 month auto loan rate on average
China's inflation data, both CPI and PPI were about as expected. The former saw a .6% rise y/o/y ex food and energy, staying on trend and reflecting actual price stability. Low consumer price inflation is good for the Chinese consumer. The PPI decline of 1.4% was the slowest decline since February 2023 in part due to the comp of -4.6% in May 2023. I'm sure too the lift in commodity and shipping prices likely was a factor. Nothing market moving here with everything about in line.
The Bank of Thailand kept its benchmark rate unchanged at 2.5%. They said, "The majority of the committee deems that the current policy interest rate is consistent with the economy converging to its potential, as well as conducive to safeguarding macro financial stability." Not sounding like a bank wanting to cut anytime soon.
Finally, in the UK in April its economy was flat from March which was one tenth better than anticipated. Again, services outperformed manufacturing and the industrial side of their economy. Yields are dipping in Europe after the two day post EU election rise with both the euro and pound lifting.
Tom Lee - Equity markets have been treading water this week in front of Wednesday when both May CPI and the June FOMC interest rate decision are released. As is typical when markets lack visibility, negative views and concerns prevail and that is why equities have been drifting lower since Friday. But we believe Wed will mark a positive turning point for stocks.
Street consensus is looking for May core CPI MoM change of +0.28%. This is a modest step down from the +0.29% MoM in April and a meaningful improvement from the +0.36% to +0.39% monthly readings from the start of the year.
A +0.28% reading, in our view, is a positive and would likely support a rally in equities. As we mentioned earlier this week, stocks rallied in the most recent 5 of 6 FOMC rate decision. – Post-presser (2:30pm)….5D and 10D gains – Nov 1, 2023……+3.8%….+6.6% – Dec 13, 2023….+0.0%….+1.8% – Jan 31, 2024…..+2.4%….+2.5% – Mar 20, 2024…+0.7%….-1.2% – May 1, 2024……+2.0%….+4.3%
We think the case exists for an even stronger positive move. The reason for this is that a soft May CPI shows the momentum has shifted downwards for inflation. And as we noted multiple times, the drivers for upside readings in inflation for the past 6 months have been two lagging factors: – housing which the CPI measurement is catching up to market readings – auto insurance which has been rising at >20% rate and is catching up as well
To recap on auto insurance, premiums have been soaring as auto insurers are adjusting rates to reflect the combination of higher cost of repair, rising frequency of accidents and higher labor and parts costs. But at some point, auto insurers will have caught up and this impact on CPI will slow. In the April CPI report, Auto insurance rose 23% yoy and accounts for +0.60% of the excess +1.61% higher core CPI. So it is a sizable contributor.
One of our clients, PB, has compiled premium requests for increases from 7 insurers and his work shows that this premium request leads auto CPI by about 6 months. And if this analysis plays out in 2024, premium growth rates YoY should start to slow before the end of first half 2024.
This could be a downside factor for a better than expected core CPI on Wed. And the other is whether housing/shelter/OER (owners’ equivalent rent) show improvement.
The composition of CPI continues to show a much healthier picture for inflation. For instance, if we look at the “% of CPI components with inflation below the pre-pandemic average, this figure stands at 51%. This is above the 50% avg since 1980. In other words, roughly half of the CPI components have inflation rates below their pre-pandemic averages. And ISM surveys both manufacturing and services show prices paid readings back to pre-pandemic averages. See our notes last week on this.
Bottom line: Wednesday should mark the positive turning point for stocks
The main event is this Wednesday with both CPI and FOMC. Overall, a very important macro week for stocks. We remain constructive on stocks in June. There are reasons to be constructive on stocks near term, which we discussed recently.
The 6 supports/catalysts for the month of June: – first, high probability June a positive month (seasonal below) – second, favorable inflation data points: – third, low utilization of leverage, measured by NYSE Margin Debt – fourth, $6 trillion and growing cash on sidelines, yep, still – fifth, persistent pessimism on market and the US consumer – sixth, EPS season shows AI spending/transformation still strong
And if the seasonal median gain of +3.9% is correct, the S&P 500 could possibly touch 5,500 during the month. We still stick with what is working:
Another strong missive from Danielle DiMartino Booth:
“Main Street” to a dismal scientist might conjure a childhood trip to Disneyland. In 1950, Harper Goff, who Walt Disney retained to design his theme park’s main thoroughfare, photographed the Main Street of his youth in Fort Collins, Colorado. These days, it’s likelier that economists think of the National Federation of Independent Business (NFIB) when they hear “Main Street.” QI mentor and NFIB Chief Economist Bill ‘Dunk’ Dunkelberg consistently reminds his fellow countrymen and countrywomen that small businesses produce more than 40% of GDP and employment.
The import of ascertaining what most vexes small business owners is why the NFIB’s Small Business Economic Trends survey has always asked: “What is the single most important problem facing your business today?”
Last month, those answering ‘Financing’ rose to the highest since June 2010 -- the 6% tallied tops the range over the last couple of decades (blue line). Moreover, past runs to this level also coincided with Federal Reserve policy being at the tightest point in the cycle, illustrated by the toppings in the prime (green line) and small business rates (red line).
That said, a multitude of concerns were voiced. Inflation (22%), Quality of Labor (20%), Taxes (13%), Cost of Labor (10%) and Government Requirements (9%) all outranked financing. Leveling the playing field with our favorite normalizer, the z-score, yielded an interesting revelation. Using the Fed’s tightening cycle as a canvas, business concerns that were above normal (i.e., sported a positive z-score) in March 2022, the month of the first rate hike, were still below normal. At a +1.3 in May, Financing was the sole concern to flip from below normal to above normal; it came in third on this basis behind Inflation, with a +2.7 score, and Cost of Labor, at +2.2.
By shifting the basis of comparison, it becomes clear that Higher for Longer policy is causing a ripple effect across Main Street. With Current Sales weakness persisting (yellow bars), NFIB explained that “a more positive view of the future economy and economic policy would help stimulate longer-term investment spending, but currently owners’ views about the future are not supportive and financing costs are very high” (bolding ours).
Coupled with a higher cost of capital, top-line headwinds command a cautious outlook for expansion. Proprietors are bearish when it comes to expanding future supply. Inventory Plans have been a net negative since late 2022 but have relapsed in the last several months (orange line). This ups the ante for future orders disappointments. Because S&P Global’s Manufacturing Purchasing Managers Index (PMI) covers the small business sector, the read-through from the NFIB series leans towards a relapse into contraction from May’s 50.3 reading (purple line) as early as the June report.
Lingering on the theme of supply, small business Inventory Sentiment plumbed to a level that harkens back to Volcker’s time at the Fed’s helm. A net negative 8% viewed current stocks as “too low,” down four points from April and the lowest since October 1981 (lilac line). The sudden oversupply signal speaks to a burgeoning demand/supply imbalance and flags additional deflationary headwinds for durable goods pricing, which we’ll be expecting in today’s Consumer Price Index (aqua line).
A widening cyclical warning sign radiating from the durable goods space helps explain why small business uncertainty is on the rise as planning for the future grows more challenging as a factor of time. The NFIB Uncertainty Index sums “uncertain” and “don’t know” responses to six questions about Future Expansion, Business Conditions, Sales, Employment, Financing, and Capital Expenditures. In May, this index jumped 85, a four-year high (fuchsia line).
A hometown mainstay and purveyor of the ultimate indulgence– homemade flour tortillas – is the latest small business casualty. As reported by the San Antonio Current, La Amistad Tortilleria will close its doors June 30. Per a Facebook posting, “With a heavy heart, we come here to announce that we will be closing down [our] business. With 40 years of serving the community, we have made many great relationships and have been a part of many generations.”
Dunk’s parting shot in his monthly commentary was as succinct as it was profound: “…uncertainty is the enemy of progress.” To that end, Main Street casualties are sending a signal to Wall Street. A higher Uncertainty Index captures the rising dangers of left-tail outcomes for financial markets. Stocks have an innate aversion to uncertainty. Ergo, seeing the CBOE’s SKEW Index (light blue line) rise alongside the Uncertainty Index highlights two sides of the same coin we dare not toss -- overvaluation and rising correction risks.
