Dow declined 330 (session lows), decliners over advancers better than 3-1 & NAZ was off 183. The MLP index fell 1+ to the 271s & the REIT index gained 5+ to the 365s on lower yields. Junk bond funds were little changed & Treasuries continued in demand by investors, lowering yields. Oil fell 1+ to 78 & gold was flat at 2363 (more on both below).
Dow Jones Industrials
New York Federal Reserve Pres John Williams said inflation is still too high, but he is confident it will start decelerating later this year. With markets on edge over the direction of monetary policy, Williams offered no clear indication of his position on possible interest rate cuts. Instead, he reiterated recent positions from the central bank that it has seen a “lack of further progress” toward its goals as inflation readings have been mostly higher than expected this year. “The honest answer is, I just don’t know,” Williams said during a Q-&-A session. “I do think that monetary policy is restrictive and is bringing the economy a better balance. So I think at some point, interest rates within the US will, based on data analysis, eventually need to come down. But the timing will be driven by how well you achieve your goals.” Williams called the policy “well-positioned” & “restrictive” & said it is helping the Fed achieve its goals. Regarding potential rate hikes, he said, “I don’t see that as the likely case.” Earlier this year, markets had expected aggressive rate cuts from the Fed this year. But higher than expected inflation readings have altered that landscape dramatically & current pricing is pointing to just 1 decrease, probably in Nov. “With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year,” Williams said. “But let me be clear: Inflation is still above our 2% longer-run target, and I am very focused on ensuring we achieve both of our dual mandate goals.”
Fed’s Williams says inflation is too high but will start coming down soon
The US economy grew more slowly than initially thought during the first qtr. The Bureau of Economic Analysis's (BEA) 2nd estimate of first qtr US gross domestic product (GDP) showed the economy grew at an annualized pace of 1.3% during the period, down from a first reading in Apr of 1.6% growth & in line with estimates. The update to the first qtr growth metric "primarily reflected a downward revision to consumer spending," per the BEA. Personal consumption in the first qtr grew at 2%, down from a prior reading of 2.5%. The reading came in significantly lower than 4th qtr GDP, which was revised up to 3.4%. The slowdown in headline GDP comes at a time when markets have been sensitive to any readings indicating that the economy may be running too hot for the Federal Reserve's liking, as inflation has proved stickier than expected. The concern is red-hot growth would boost price increases. Many forecasters don't see the first qtr economic growth slowdown as the start of a broader trend. Prior to this reading, Goldman Sachs expected 3.2% annualized growth in the 2nd qtr. Meanwhile, the Atlanta Fed's GDPNow forecaster is currently projecting 3.5% annualized growth in the 2nd qtr.
The US economy grew at a slower pace than initially thought in Q1
Foot Locker's (FL) turnaround is starting to bear some fruit. The sneaker giant
saw comparable sales decline 1.8% during its fiscal first qtr, far
better than the 3.1% drop-off that had been expected. The
company also reaffirmed its fiscal year guidance, which projects sales
to be between a 1% decline & a 1% gain, compared with a decline of
0.6% that analysts had forecast. EPS for the 3-month period that ended May 4 was 9¢, compared with 38¢ a year earlier. Adjusting for 1-time items, including
impairments associated with certain store closures & restructuring,
among other costs, EPS was 22¢. Sales dropped to $1.88B, down about 3% from $1.93B a year earlier. For
the full year, FL expects adjusted EPS of $1.50 - $1.70, ahead of estimates of $1.57. The company is expecting comparable sales growth of 1-3%, ahead of the 1.5% growth that analysts had expected. “We had a solid start to the year in
the first quarter, which demonstrates that our Lace Up Plan is working,”
CEO Mary Dillon said. “The reason I feel confident
— we’re launching an enhanced FLX rewards program, so we have a lot of
opportunity with rewards. We’re launching a revamped mobile app, which
we know is a great way to drive customer engagement and commerce and we
see growth opportunities ... with all of our brand partners throughout
the year, including returning to growth with Nike in the holiday
quarter.” The stock went up 3.35 (15%, but off early highs).
Foot Locker stock surges 20% as turnaround shows signs of life
Gold prices trimmed some of yesterday's losses & rose 0.4% after the Gross Domestic Product (GDP) showed the economy is slowing, reigniting hopes that the Federal Reserve (Fed) may cut rates later in the year. The XAU/USD trades at $2347, bouncing off daily lows of $2322. The yield of the 10-year note collapsed almost 7 basis points (bps) to 4.548%, while the Greenback followed suit. The US Dollar Index (DXY) lost 0.43%, at 104.67. The US economy grew at a slower rate than in the 4th qtr of last year, indicating that higher borrowing costs set by the Fed are taking their toll on the economy. Meanwhile, the Dept of Labor revealed an increase in the number of people applying for unemployment benefits.
Gold Price Rebounds Due to Soft US GDP Fueling Rate Cut Speculation
West Texas Intermediate (WTI) crude oil closed lower as inflation worries offset a report showing US inventories fell sharply last week. WTI crude oil for Jul closed down $1.32 to settle at $77.91 per barrel, while Jul Brent crude, the global benchmark, was last seen down $1.60 to $82.00. In its weekly survey, the Energy Information Administration reported US oil inventories fell by 4.2M barrels last week, well more than the consensus estimate for a drop of 1.9M barrels. However gasoline inventories rose by 2M barrels while distillate stocks rose by 2.5M barrels. The bullish inventory report failed to spur buying as the market turns risk adverse ahead of the tomorrow's release of the Personal Consumption Expenditure Index for Apr, the Federal Reserve's preferred inflation measure. The estimate expects the report to show inflation at a 2.7% annualized rate, unchanged from Mar & still ahead of the Fed's 2% target.
WTI Crude Oil Falls Despite a Drop in U.S. Inventories as the Market Avoids Risk Ahead of Friday Inflation Data
Lingering concerns about higher-for-longer interest rates are making investors nervous. The revised GDP data (see above) gives hopes for the Fed to cut rates sooner. But the overriding sentiment remains gloomy. Tomorrow's inflation data comes 11 days before the next Fed meeting.
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