Markets rise cautiously, looking for direction

Dow was up 41, advancers over decliners about 3-2 & NAZ rose 92.  The MLP index added 1+ to the 282s & the REIT index hardly budged at 380.  Junk bond funds were mixed & Treasuries had some selling which took yields a little higher.  Oil was steady at 80 & gold gained 10 to 2427 for a new record.

AMJ (Alerian MLP Index tracking fund)

Inflation is likely to stick around at higher-than-desired levels for the rest of the year, according to a new survey.  "With the higher inflation expectations, panelists now anticipate the Federal Reserve’s Open Market Committee will cut rates by half a percentage point – down from three-quarters of a point and to occur later in the year than previously expected" wrote National Association of Business Economics (NABE) Pres Ellen Zentner, who is also chief economist at Morgan Stanley.  NABE's May survey, which includes 43 professional forecasters, now pegs inflation to stall at 2.6%.  While down from Apr's consumer price index reading of 3.4%, it remains above the Fed's preferred 2% target, a level expected to green-light interest rate cuts.  Still, prices have come down sharply from the 9.1% peak.  About 48% of market participants see the Fed cutting rates for the first time in Sep to 5.00-5.25%, according to the CME's FedWatch Tool, which tracks the probability of rate moves.  The Federal Funds rate is currently at 5.25%-5.50%.  Still, Fed Chair Jerome Powell was a bit downtrodden about the inflation battle in his remarks last week.  "We did not expect this to be a smooth road, but these were higher than I think anybody expected," he said.  "What that has told us is that we will need to be patient and let restrictive policy do its work," he said during a panel discussion at the Foreign Bankers' Association in Amsterdam.  His remarks followed a month-over-month 0.4% rise in the producer price index for Apr, which tracks prices at the wholesale level & annually, prices rose 2.2%.  Both were higher than previous reports.  Americans are paying more for everyday staples, especially food, compared to a year ago, including a 4.8% jump for canned vegetables, hot dogs are up 7.1%, butter 3.5% & sugar 4.3%, as reported in Apr's CPI.

Higher inflation in 2024 likely: NABE

Treasury yields ticked higher as investors looked ahead to fresh economic data & comments from Federal Reserve officials slated for the week.  The yield on the 10-year Treasury was 2 basis points higher at 4.837% & the 2-year Treasury yield was last up 1 basis point to 4.837%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Existing as well as new home sales data is due this week, as are durable goods orders figures.  Minutes from the Fed's latest meeting will also be published, which investors will be parsing through for fresh insights into the central bank's thinking about the economy & monetary policy.  The Fed left interest rates unchanged at its last meeting & indicated that interest rates would not be cut until policymakers were more confident about inflation easing to its 2% target.  Key inflation data has been released since then, with the consumer price index for Apr coming in just below estimates at 0.3% on a monthly basis last week.  The annual CPI reading was in line with expectations of 3.4%.  The producer price index for Apr was slightly higher than previously expected.

Treasury yields hold steady as investors await data, Fed comments

Gov debt that has swelled nearly 50% since the early days of the Covid pandemic is generating elevated levels of worry.  The federal IOU is now at $34.5T, about $11T higher than where it stood in Mar 2020.  As a portion of the total US economy, it is now more than 120%.  Concern over such eye-popping numbers had been largely confined to partisan rancor on Capitol Hill as well as from watchdogs like the Committee for a Responsible Federal Budget.  However, in recent days the chatter has spilled over into gov & finance heavyweights, & even has one prominent financial firm wondering if costs associated with the debt pose a significant risk to the stock market rally.  “We’re running big structural deficits, and we’re going to have to deal with this sooner or later, and sooner is a lot more attractive than later,” Fed Chair Jerome Powell said in remarks Tues to an audience of bankers in Amsterdam.  While he has assiduously avoided commenting on such matters, Powell encouraged the audience to read the recent Congressional Budget Office (CBO) reports on the nation's fiscal condition.  “Everyone should be reading the things that they’re publishing about the U.S. budget deficit and should be very concerned that this is something that elected people need to get their arms around sooner rather than later,” he added.  Indeed, the CBO numbers are ominous, as they outline the likely path of debt & deficits.  The watchdog agency estimates that debt held by the public, which currently totals $27.4T & excludes intragovernmental obligations, will rise from the current 99% of GDP to 116% over the next decade.  That would be “an amount greater than at any point in the nation’s history,” the CBO said in its most recent update.  The agency forecasts a $1.6T shortfall in fiscal 2024 — it is already at $855B thru the first 7 months — that will balloon to $2.6T by 2034.  As a share of GDP, the deficit will grow from 5.6% in the current year to 6.1% in 10 years.  “Since the Great Depression, deficits have exceeded that level only during and shortly after World War II, the 2007–2009 financial crisis, and the corona­virus pandemic,” the report stated.

Soaring debt and deficits causing worry about threats to the economy and markets

Dow began trading in the red, but bulls returned & were able to lift it in the black,  Stocks have gained as investors become more optimistic that the Federal Reserve will soon cut interest rates, despite words of caution from policymakers.   The rally looks to be very tired & needs a rest.  The key question is whether that outlook is sustainable!!  Investing gold remains strong.

Dow Jones Industrials